Tuesday, July 22, 2008

The so-called rescue of Fannie Mae and Freddie Mac

Just a quick follow-up to my post about the so-called "rescue" of Fannie Mae and Freddie Mac...

I read in an article in The New York Times by David Herszenhorn entitled "Cost of Loan Bailout, if Needed, Could Be $25 Billion" that the most likely scenario is that Fannie and Freddie will not need any bailout at all, and then even an unlikely bailout would be modest and not likely to be about the order of $25 billion, and only in the most extreme (and very unlikely) scenario would the cost be upwards of $100 billion, which is still a rather modest amount considering the scale of the overall financial system. As The Times reports about comment from the Congressional Budget Office:

The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money.

The article continues:

But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion.

Sure, all sorts of people on Wall Street will gleefully trumpet the great risk of a 1-in-20 event, but that is a rather low-probability event compared to a lot of risks we in the real world take in stride.

The article also says:

According to the estimate, which was delivered in the form of a letter to the House Budget Committee chairman, Representative John M. Spratt Jr., Democrat of South Carolina, the director of the budget office, Peter R. Orszag, predicted that "a significant chance, probably better than 50 percent, that the proposed new Treasury authority would not be used before it expired at the end of December 2009."

Mr. Orszag, at a briefing with reporters, acknowledged that pinpointing the eventual cost of the package was impossible. "There is very significant uncertainty involved here," he said.

The uncertainty runs in both directions, with some government officials and market analysts suggesting that Fannie Mae and Freddie Mac are fundamentally sound and will perform well over the long-term. Others, including some private equity managers, are pessimistic and predict heavy losses.

Ahhh... so-called "private equity managers"... otherwise known as hedge fund speculators, the kind who are shorting the stock of Fannie and Freddie. Sure, they're going to give you an "objective" appraisal of the outlook for Fannie and Freddie... NOT!

The bottom line here is that there is no actual financial "rescue" going to be taking place in the near future. The whole package being pushed and dragged through Congress is simply a contingency backup plan and a tool to try to frighten off the Wall Street "private equity managers" and others who: a) are opposed to the existence to the GSEs at all, and b) are actively and maliciously attempting to push down and talk down the stock price of Fannie and Freddie in order to profit from short positions or to get a lower price when Fannie and Freddie seek to raise equity capital in the near future.

The real bottom line here is the the U.S. Treasury and Congress are signalling the grossly irresponsible scumbags on Wall Street very loudly and very clearly to back off and cease and desist from maliciously attacking Fannie and Freddie on a basis that is completely out of proportion to the actual fundamentals and actual risks of these companies and their assets. And, if the fundamentals do happen to unexpectedly deteriorate and if the risks do unexpectedly happen to rise, then YES, the U.S. government is standing by to fully back Fannie and Freddie in much the manner as investors have always presumed is the case. The idea that the U.S. government might step in and financially support Fannie and Freddie is not new or novel. I myself have known about this implied guarantee for about ten years now.

-- Jack Krupansky

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