Bottom Falling Out: CNN Reports Failure of Fannie Mae or Freddie Mac Could Push Economy into Depression
Related subjects: Economy, J.E. Robertson, Mortgage & Credit Crisis, U.S. Economy Comments Off
Amid plummeting stock values and fears of an expanding threat of mass numbers of mortgage foreclosures —estimates range from 3 to 6 million homes in foreclosure within one year—, observers have suggested failure of one of the two major government-backed lenders could push the American economy into “depression”. The Treasury Department is reported to be considering a takeover of one or both of the mortgage-backing giants, which between them control $5 trillion in debt.
The two firms have lost a combined $13 billion over the last year, and The New York Times now reports that Freddie Mac has lost 70% of its value in the last week alone, while Fannie Mae has lost 55%. There may be a plan to push for legislation not only taking over the two government-founded private firms, but which would guarantee the full amount of their combined debt. That could be a dangerous, as the $5 trillion amount could double the national debt, putting the government itself into an unsustainable position and calling into question an array of vital financial levers on which the economy as a whole depends.
The Associated Press is reporting:
As the companies’ share prices tumble, fears about their capital-raising plans have become a self-fulfilling prophecy amid concerns that Fannie and Freddie will need to sell even more shares to raise money – reducing the value of existing shareholders’ investment. If that doesn’t happen, investors fear a direct capital infusion from the government will be needed, and shareholders will be cast aside.
Pres. Bush has spoken to the press, informing the public that Federal Reserve chairman Ben Bernanke and Treasury secretary Paulson are both following the status of Fannie Mae and Freddie Mac, their solvency and their stock prices, closely, and considering measures to ensure the firms do not fail. Due to the immense size of the assets they manage, the two lenders are considered to be “too big to fail”, a term that is applied to major banks and financial institutions by analysts and policy-makers, relating to the devastating ripple effect that could ensue if they collapse.
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Talk of a government bailout and solvency problems has forced stock prices for the two lenders down by 40%, while analysts speculate as to how grave the fallout might be if the $5 trillion they manage were to go into default or have to be sold off. The amount of interest payments, i.e. financial gain, to be had from the debt held, could evaporate and result in massive losses, further tightening lending markets and driving more individuals and businesses into financial hardship or mortgage foreclosure.
The LA Times argues that “nationalization” is the proper course for the two major lenders, as “they’ve grown to their gargantuan sizes ($843 billion in assets at Fannie, $803 billion at Freddie) because investors worldwide believe their debts have the implicit backing of the U.S. Treasury”:
[William] Poole, who was president of the Fed’s St. Louis branch until he retired in March, said in an interview with Bloomberg News this week that nationalization was “the only practical course” for Fannie and Freddie.
Though he’s often labeled a curmudgeon, the 71-year-old Poole isn’t alone in his view of what to do with Fannie and Freddie, which combined either own or guarantee a total of $5 trillion of U.S. home loans, nearly half the entire market.
It is academic to explore what would happen if half of the entire US mortage market were involved in a massive corporate failure: nothing on that scale has ever occurred, and the federal government must take any possible measure to ensure that economic chaos on that scale does not inject itself into the already massive and spreading lending, housing and financial crisis.
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