Daily Blog11 Jul 08Fannie and FreddieWe encourage all Members to...

Daily Blog
11 Jul 08
Fannie and Freddie



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July 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, are too big for the government to let them fail, leading Republican and Democratic lawmakers said.

The government-chartered companies, which own or guarantee about half the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain, of Arizona, and Democratic Senator Charles Schumer, of New York.

The remarks by the presumptive Republican presidential candidate and the head of the congressional Joint Economic Committee followed a slide in the firms' shares to the lowest level since 1991. They indicate Congress would push the administration to use government funds to prevent the companies from failing and threatening a deeper housing recession.

``They must not fail,'' McCain said today during a campaign stop in Belleville, Michigan. Fannie Mae and Freddie Mac ``are vital to Americans' ability to own their own homes,'' he said at an earlier stop in the state, one of the worst affected by the surge in foreclosures.

Click here to read the rest of the article

We’ve been following this unfolding debacle for a while now. The situation does not look good for these companies. Check out the charts below. They are telling us equity holders are set to lose everything. Why? Well, Fannie and Freddie are the main sources of capital for the US housing market. They were created to buy mortgages from the regional banks, allowing those banks to use their capital to make new loans.

Fannie and Freddie, because of their implicit US government backing, can borrow at a rate lower than the regional banks. This low cost of borrowing makes its way down to the homeowner so the system was for years hailed as a way to lower the cost of borrowing for the ‘average’ American.

But now, through gross incompetence, mismanagement and carelessness, these companies are on the brink of collapse. Combined, their balance sheets support over $1.5 trillion in debt, on an equity base of around $40 billion. This amounts to criminal negligence and will ensure heads roll in the months ahead.

According to the Bloomberg article, “The Office of Federal Housing Enterprise Oversight, the companies' regulator, said today it deemed Fannie Mae and Freddie Mac ‘adequately capitalized.’” What a joke.

The upshot of all this is that the government will have to bail out the mortgage providers. This will take some time, but the eventual outcome as far as we’re concerned will be assuming the companies’ debt – nationalisation. This will send the dollar down the toilet and could well be the catalyst for sending gold well over US$1,000 an ounce.