Early this morning Ben Bernanke spoke about the current financial situation for the banking industry and what lies ahead. Although the speech was fairly normal with the usual blah blah blah "The government maintains its current position" ext; what i found to be a different is the fact the Treasury Secretary Paulson and chairman Bernanke hinted that the US government may let Freddie Mac and Fannie Mae stand on there own should one fail. Hello Einstein, pretty sure you don't have to be an expert to recognise that is a bad idea. Since Freddie and Fannie control more then 25% of the mortgages in the US and if you were to remove one or both from the game there would be a mass panic. No homes sold, no one would be purchasing or refinancing which would send prices tumbling down even further into La La Land. On wall street Liquidity would dry up as there be no paper trading, stock buying, leveraging, or borrowing to grow your compay and good old 1929 would peak its ugly head out of the grave.
Freddie Mac and Fannie Mae the two giant mortgage-buying government sponsored entities are “technically insolvent” according to former Fed Governer William Poole. I mentioned in an early post how spooky it was to see these massive GSEs go through the same death throes as the big lenders that have imploded before them; as it seemed a sure sign that they were-even in their monsterous size-not too big to fail.
From Bloomberg by way of Mish’s excellent post on the subject:
Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.
“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole, 71, who left the Fed in March, said in an interview.
“At some point we’re going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,” Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television. “We’re getting to that point where a decision has to be made by Washington.”
The government will not let the GSEs fail which means that all taxpayers are homeowners now. More from Mish on the subject:
Fannie Mae holds or guarantees over $5 trillion in mortgages. A mere 1% decline would wipe them out. Is that adequately capitalized? I do not think so and neither does Minyanville’s Kevin Depew.
We’re All Homeowners Now
Here are two video links on the impending nationalization of Fannie Mae.
We’re All Homeowners: Nationalization of Fannie, Freddie UnavoidableDepewTube: Nationalizing Fannie and Freddie
“Fannie Mae and Freddie Mac are not adequately capitalized even if the housing market turned around today. And it’s not going to turn around today“.
Remember a few months back when everyone was saying “we’re through the worst of it?” That blogs like this one were continuing to spout bad news without regard to signs of improvement and life in the market? In my estimation my only mistake has been to be not bearish enough on the market. A GSE failure would be historic in terms of our country’s history of financial meltdowns.