Sunday, September 7, 2008
Fannie and Freddie Get Taken Over
Over the weekend Fannie Mae and Freddie Mac were taken over by the US Government. It was only a matter of months ago when the solution to the growing mortgage problems was to up the loan limits so these two giants could guarantee bigger mortgages. I guess that did not work out. The speed at which this ‘rescue’ happened is testament to just how bad the books must look at these two quasi governmental organizations. With home prices collapsing in many markets, and generally soft almost across the country, I just cannot simply imagine how much money they have effectively lost. I cannot imagine. The reality is they likely have no idea either. Their portfolios are just so large and so complex, that the only possible buyer was in fact, the US Government.
Good Move, and really, it was the only move and the sooner the better. Way too much depends on the perceived credit worthiness of these two entities. Numbers I have recently read have showed that foreigners have been easing up buying their paper, and a broad based dumping of the stuff would have been an absolute disaster. Can anyone spell financial tsunami?
As to the highlights of the plan you can read here for an overview. I have not yet had a chance to pour through all the commentaries as to the details, but I am sure they are few and far between right now. Although I can understand the markets in general reacting positively to this news in the short term, long term I am not so sure. Japanese banks in particular hold a boatload of this paper so I would not be surprised if a plane load of sushi is on it's way to Washington as I type this.
Without a doubt Fannie and Freddie's balance sheets are going to have to shrink, big time. Where are all those lovely bonds going to go? Both of these companies are leveraged big time, bigger I think then even the investment banks, and of course multiples of commercial banks. Oh, and what about the balance sheet of our country? It looks a whole lot different as of right now. First it was open up the discount window and now this. What is next? Will another I-Bank be too big too fail but this time JPM says no? None of this can be good for the dollar over the short to medium term.
So yes, still a good move as yet again another immediate disaster is avoided, but it will come at a cost. A less bloody and nasty cost I think, but still a cost.
As an ex mortgage backed bond trader, I will most certainly be writing a lot more about this in the days and weeks to come. Stay tuned.