this will have huge riple effect on the economy, and the financial markets. The goverment will either let them go under, and risk that mortgage issuing for average joe, stops overnight and a huge flight of foreign capital from the US, or take them over and de-value the dollar even more and create more inflation.
The sad part, is both Fanie Mae, and Freddie Mac were used to stash and securize bad mortgages, basically shielding away the banks that made the poor decissions to issue these toxic mortgages in the first place.
It is sad, but the rich is getting richer (and they took huge bonuses when all was rosy), and we all are paying for it now.
Either way, nuclear winter is comming. Even the SF Bay area is not feeling anything in this recession, other parts of america are reeling.
The government won't allow them to go under. It would lead to a housing depression, and during an election year, is not good for the incumbent.
Also, it would set up a string of revaluations on credit default swaps, which there are about 4 trillion dollars worth floating around in an unregulated market. So the two companies will probably get nationalized, along with a government bailout of Lehman brothers.
It's funny to see everyone fight against the free market when it goes against them. Freddie and Fannie are shit. They have been shit. When they raised the loan limits to 750,000 a couple months ago, it just allowed them to pile on more shit. The bad loans coming out of California could be repackaged and sent to these companies at the taxpayer's expense.
These companies are overleveraged, poorly managed, unhedged, and are running out of cash. The only reason they're solvent is that they value their asset classes way above what they can get on the market right now.
Unfortunately, we have to bail them out. If we didn't, it would take down our financial system. But the actions of the Fed and the Treasury create a behavioral incentive for companies to take undue risk, because they know they have the government as a safety net. It's not fair to the taxpayers.
When we get over this mess, we need to find solutions to prevent this from happening again. Examples such as creating a regulated market for credit default swaps, and limiting the amount of leverage and directional risk a firm can take.
Here's a way to make sure it doesn't happen again: don't let it happen this time.
Get on the phone to your congresspeople NOW, and don't stop pestering them until they pass law barring the fed from nationalize the GSEs. Fannie and Freddie do have some ability to put back fraudulent securities, so let them do so and make the banks take their medicine.
We're already in a housing depression. Prices will to go back to normal (~3x incomes) regardless of who we bail out. Nationalizing this crap is another misstep that will lead to a long and painful depression, partly because the borrowing costs for the US government have the potential to go through the roof. The government and taxpayers need to save themselves right now, or things could (will?) get much worse.
If the government protects itself and keeps it's own borrowing costs low, then there is a framework to supply new banks with credit. If not, well...
The amount of desire for market reforms is inversely proportional to how well the public's portfolio is doing.
Noone wanted market reforms when their Enron stock was up 300% or when they owned a sizeable chunk of pets.com.
Hopefully this time we'll start to see some reforms that make sense.
Also of note: I don't think the legislative branch has any call on whether these shit companies get nationalized... it's up to the Treasury (exec branch) and the Fed (off on its own).
The sad part, is both Fanie Mae, and Freddie Mac were used to stash and securize bad mortgages, basically shielding away the banks that made the poor decissions to issue these toxic mortgages in the first place. It is sad, but the rich is getting richer (and they took huge bonuses when all was rosy), and we all are paying for it now.
Either way, nuclear winter is comming. Even the SF Bay area is not feeling anything in this recession, other parts of america are reeling.