January 08, 2008

Should US taxpayers bail out Fannie Mae and Freddie Mac when they fail?

They will fail. Nothing will stop that.

But when they do, will these reckless "government sponsored enterprises" with "implicit federal guarantees" be bailed out by the US treasury? Should your tax dollars go toward propping up the stupid and corrupt activities at Fannie and Freddie?

If the answer is "NO!", close your eyes and picture how bad the repercussions will be.

If the answer is "YES!", picture how worthless your dollars will become.

Either way, we're f*cked. All because the REIC bribed our congressmen, because the leadership of Fannie and Freddie were motivated to secure short-term gains in order to enrich themselves, and because the mainstream media in the United States stopped doing their jobs.

Get ready. We're coming in for the crash landing and it's gonna be awful. Yet all so predictable.

What will we do if big two go bust?

They don't know it, but taxpayers stand to lose billions as the housing bubble bursts. And in a bipartisan effort to "do something" to save the housing market, President Bush and the Democratic Congress appear set to put taxpayers on the hook for billions more.

Until now, losses in the housing world have been confined to homeowners, mortgage lenders, banks and investors in toxic mortgage securities. But by virtue of the implicit federal guarantee backing mortgage giants Fannie Mae and Freddie Mac, U.S. taxpayers may be one of the largest mortgage lenders in the world - set to lose billions, like all the others.

Between them, Fannie Mae and Freddie Mac back more than $4 trillion in mortgages. If they fail, it could force an unprecedented taxpayer-funded bailout. And they are much closer to failure than most people realize.

In a recent Securities and Exchange Commission filing, Fannie noted that it backs $2.6 trillion worth of single-family home loans. Underneath this pile of debt, the company has only $42 billion of capital. If the value of mortgages backing Fannie's debt falls a few percentage points, the company's capital could be wiped out. And because of the implicit government guarantee backing Fannie's debt, American taxpayers would be on the hook for whatever debt Fannie couldn't cover.


Butch said...

First of all, let's get a handle on the total numbers:

Fannie, Freddie AND the FHLB system currently hold directly or guarantee $6.5 trillion in mortgages/MBS.

Furthermore, these entities have approximately $1.5 trillion in derivatives positions to "hedge" against losses.

Finally, my research leads me to conclude that the total losses that these entities will face as the real estate bust continues will be somewhere around $1 trillion (again, JUSt these three entities).

Therefore, worse than just a simple "bailout", I firmly believe that the entire mortgage industry will be "nationalized" as Fannie/Freddie/FHLB fail and the U.S. government takes them over outright. Then, the feds will announce a new program that reduces the principal owed by the sheeple (and perhaps at a lower interest rate as well), and the losses (then measured in the multiple trillions of dollars) will be:

1. Monetized by the Fed (by the Fed buying the government bonds that will be issued to fund this fiasco.

2. Monetized by our debt-enablers (China, Japan, OPEC countries)

3. Dumped off on the taxpayer.

4. Or, all of the above.

Finally, there will be created an "RTC II" program to deal with the five-to-ten million McMansions dumped back on the market that the homedebtors can't afford even WITH the emergency program of nationalization of mortgages--unless the feds just let the sheeple squat in the properties because the problem is too large to let the foreclosure process run its course.

I'm sorry to report that the U.S. will be resorting to a Soviet-style mortgage industry, run by the state but I just don't see any other alternative that the feds will consider.

Surely, they won't just let the real estate/mortgage industry collapse and blow a multi-trillion dollar hole in the economy (plus the tens of trillions of dollars of derivatives positions).

Tangelo Mozilo said...

Forgive me. I'm a bit thick.

How exactly would it hurt me if Fat Fannie and Fat Freddie went into receivership? Is it just that their employees would lose their jobs and their investors would get screwed?

If that's all there is, I don't care. Let them go under. These bloated GSEs serve no purpose anyway. All they do is make real estate more expensive by subsidizing debt that is factored directly into the selling price. The result is that buyers have to take on more debt to buy real estate, but that that debt is cheaper to service for the average monthly consumer slob.

How retarded is that? The Fat twins actually make it more expensive to buy a home. I thought that that was the OPPOSITE of what they were supposed to do.

Anonymous said...


Regardless of who bails them out, US treasury or Tax dollars, it is very irresponsible for the government to do that. I believe however, that it will be tax dollars and not the US treasury that will bail them out.

These are the type of things that get people tired of government. And I sincerely believe that this is what got Hillary in trouble, with her grand idea of bailing out the people troubled mortgages.

Anonymous said...

Yes, US Taxpayers should be on the hook - that is, limited to those that took part in the orgy - anyone who purchased a home and/or refinanced since 2000. It would be easy, they could just get rid of the interest deduction and then split all the costs.

Paul E. Math said...


The backing of fannie and freddie by the US govt is only implicit. We should stop even referring to it as 'backing' at all. There is no formal, official backing by the US govt and that should be what counts.

When fannie and freddie fail, one consequence will be that the holders of their mortgage-backed securities won't get paid. That's fine since they're all rich foreigners and hedge funds anyway.

The other consequence of a fannie and freddie failure is that there will be A LOT less money out there to lend to homebuyers. It will become very very hard to get a mortgage. The cycle will get even more vicious as less qualified buyers means lower prices and further foreclosures.

However, the vicious cycle can be offset partially if new enterprises are created in place of fannie and freddie. The new enterprises should have very strict rules on the mortgages that they can buy and, because foreign investors will need further incentive to buy the mortgage backed securities they issue, they should have the formal and official backing of the US govt.

I don't mind offically backing an enterprise like fannie and freddie as long as the mortgages they fund and securitize are of the safest, most rock-solid variety.

Boom2Bust.com said...

Should Fannie Mae and Freddie Mac fail, it will be argued that the American taxpayer MUST bail these entities out in the interests of the larger U.S. economy. Just like we're seeing with the ongoing homeowner "rescue" initiatives.

Kind of makes you want to be irresponsible too, huh?

Shakster said...

yes-Taxpayers ,and VOTERS.
They wanna go along blindly letting others look after their affairs Screw-em.

Anonymous said...

They're bailing out CFC as we speak, what makes you think they aren't going to bail out FNM? The American people rely on ever appreciating houses for money to live. This is how it will work: Loan forgiveness for banks and individuals alike. Everybody gets a clean slate. Everybody gets the same credit score.

Anonymous said...

thanks housing speculators!

Anonymous said...

supporting these 2 was fine, BEFORE the housing bubble!

Nocorporatewelfare said...

Implicit my a$$. There's also an explicit requirement for the U.S. government to find and deport all the illegal aliens but I'm not holding my breath. Let the lenders take their losses, that's who stands to benefit here.

Anonymous said...

Hell no! This ship is going down folks and there's no way to stop it. Best thing we the people can do is save our own asses by getting OUT of the US dollar. Pronto!!

born to lose said...

Maybe we should just not honor our obligations like everyone else and say we decided to not guarantee those loans and just walk away.

Anonymous said...

This is how it will go down.

Fannie & Freddie will have to issue "special recapitalization bonds".

Federal Reserve will buy them at their farcical face value of a "AAA issuer", instead of the BB- reality, using money created out of a computer.

Any earned interest on these bonds goes to the Fed, which then turns it over to Treasury.

This way, They can claim "no taxpayer money was used" which is technically true.

Yes it will be inflationary, but in the context of a massive deflationary de-leveraging, it will be seen as the least bad alternative.

And, it probably is.

A default on their obligations would be be much worse.

Especially for registered voters.

Anonymous said...

Don't forget that many of the monolines that insured the MBS and CDO are not sufficiently capitalized. There is no way in hell they survive this mess. Many of these bonds were AAA because they were insured. What happens when the insurer files for bankruptcy?

Then we move on to derivatives that were used to hedge against a downturn in the market. Many of these contracts were written by hedge funds and sold OTC. These hedge funds have no chance in hell to make good on those contracts. That's like buying your home insurance from a homeless guy living under the bridge. When your house burns down, do you think the homeless guy can cut you a check for the $250,000? He spent all the money on booze.

Andy in San Diego said...

Just put it on my tab.


Jeez, we're going to be washing dishes in foreign countries for years and years and years and years...

happy homeowner in the stix said...

Hate to say it, but it doesn't matter if we should or shouldn't bail them out. They will get bailed out, if they are in that kind of trouble.

Simple as that.

Now....don't know exactly how it will affect other things. Some things can be predicted, and possibly the damage can be mitigated. It's the crap that no one ever dreamed about, however, that is gonna come back and bite us in the ass (Barings Bank, anyone?).

Yoski said...

It depends when they will fail if they get bailed out or not. There might be too many entities that are too big to fail all failing at the same time. Eventually government and the Fed figure they're doomed no matter what they do and let things just run their course.
Once the smoke clears my hope is that we can finally do away with ALL government "sponsored" enterprises. All they do is drive up the price for housing and education. They're really just turning us into life long debt slave. I hope we take the opportunity and dispose of them once and for all. They convey no benefit what so ever to the American people.

Anonymous said...

About a month ago, I told all of you idiot HP'ers that indeed there will be a national bail out. I bought a house I could not afford for 0% down and with an Option ARM and I am now down and out of my luck. Of course the government will bail out people like me. I got sick and tired of seeing people get away with irresponsible financial behavior and thus I decided to join the party. If you folks save your money and live a conservative life, then you are a FOOL because it is PEOPLE LIKE YOU who ultimately finance my lifestyle.

Anonymous said...

Are there any ideas on how to stop this government bail out? I am a conservative person; I saved my money, I invest for my future, I don't live a lavish lifestyle and several years ago when I saw the real estate bubble I decided to rent.

Now the government will bail out the lenders, Fannie Mae, Freddie Mac and of course via a "freeze" borrowers. Let's face it, the government will eventually bail out borrowers too. The government is not going to allow several million dollars to just go PUFF and disappear.

So how can we stop this from happening? PLEASE only constructive comments/answers to my questions please?

Anonymous said...

Freddie and Fannie, Mortgage Intrest Deduction, Down Payment Assistance Programs, and the Fed needs to disappear. They have only created this large misallocation of capital.

Anonymous said...

The only people that should get their money back are the people with FDIC insured accounts .Why? Because the people that put money in these accounts accepted a lower yield for that safety ,while all the other high rollers went for the higher yields on the accounts that aren't insured .

Maybe one day the people that created this mess will be held accountable . The basic problem was that loan risk was ignored in a easy money lending cycle . Ignoring loan risk created a false market of appreciating real estate prices that are now crashing .