Kali-forniarrr

ha ha. Love to see how the New Not the Old Republican party don't link themselves to this one.

Better start using the greenback as toilet paper now. Brown is the new green

Wonder when they'll start defaulting on the national debt...

Giantaxe

That's exactly what's comically ironic about this mess. Privatize the gains, socialize the losses... it's the Republican way.

chartreuse

You mean the bumper sticker was right and my Confederate money is going to be worth something again?

goatherder

pfff.. Was only waiting for politics to come into this

The Democrats did create Freddie and Fannie in the first place. Socialised Home Lending... Recently Republicans wanted to put greater fiscal regulation around these entities because they were widely assumed to be government backed and hence the cheaper loans for all.

Admittedly no one actually bothered to sort out a basic duopoly over the years

Lets see how they sort it out now. I still believe this is positive for the US economy in the near term and we'll see better liquidity because of it.

Giantaxe

I think Nixon signed the latter into existence.

Yes, to their credit, a number of Republicans (and Bush to a certain extent) have wanted better regulation and scrutiny. But F & F have spent lobbying $$$s in typical American fashion to ensure that nothing happened. We're now seeing the almost inevitable result of that lack of supervision (and likely downright fraud).

goatherder

FDR started the mess I think... just after the depression. LBJ then tried to remove the liability from the govt balance sheet in 68 and sort it out but managed to cock it up completely.

Have to agree with you there. I was hoping McCain might stay his previous line re pork-barrelling / corruption etc... but with his recently actions and choice of the "hockey mum" redneck naughty schoolteacher as his second I feel its back to normal processing on both sides.

Oh well - maybe one day I might actually be able to vote...

Michael

I can understand why the government bailed out Bear Stearns. Without the bail out, a run may have occured on all the brokerage houses.

As far as banks, when they become insolvent, the government backs all deposits up to $100,000 keeping a run from occuring.

When it comes to Fannie and Fredie, I don't see a big disadvantage of allowing them to fail. Fannie and Fredie do not have deposits so the only loosers are the investors that hold stock and corporate paper.

However, the financial system around the world is very fragile. Only about 1% of a nations worth is held in hard currency (M0 money supply which is only about $700 billion in the US). Approximately another 9% is in saving, checking, money markets, CDs, and government securities. The remaining 90% is magic.

goatherder

the small matter that they hold around 50% of the USA mortgages in one form or another.

Plus they are about the only one lending at the moment so its allowing people to remortgage. With an election around the corner I can't see how letting them fold is a sensible idea politically. The government would then also be open to some pretty serious suits in that these two organisations have essentially had a government guarantee which has allowed them to exist and operate.

Goat.

Michael

Neither Fannie Mae or Freddie Mac hold mortgages but are only loan guarantors. They are both Government Sponsored Enterprises (GSEs) but nothing in its charter indicates that the government will bail out investors.

Ginnie Mae and FHA are government enterprises. I would think Ginnie Mae and FHA could perform the financing and guarantor of any new mortgages.

goatherder

they guarantee or own 50% of the mortgage bonds out there - if you pull them out of the picture you have huge uncertainity around counter party risk which would shut down the mortgage business for a large amount of time.

If the banks can't trust who guarantees the bonds they hold and also the bonds they issue it all becomes very very difficult to know who is backing up who. Much like the issues we've seen in the CDO and CDS markets - uncertainity about counter party risk and hence liquidity issues.

Fannie particularly has in the past 2 years at least been purchasing mortgage bonds on the market using their lower cost of capital (due to the assumed and effective government guarantee of their activities) to generate earnings based on interest cover. Not exactly part of their initial charter.

They may not own the mortgages but they pretty much do thru their activities as insurers in this market.