U.S. Weighs Takeover of Two Mortgage Giants

Photo: Jonathan Ernst/Reuters Henry Paulson, left, and Ben Bernanke at a House hearing.ssss

Highlights:

• Fannie Mae and Freddie Mac: "Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

• Together the Two Agencies: "Touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds."

• Representative Dennis Moore, (D) Asked whether the failure of either institution would pose a risk to the financial system: “In today’s world I don’t think it is helpful to speculate about any financial institution and systemic risk,” Mr. Paulson said. “I’m dealing with the here and now, and the important role that they’re playing and other financial institutions are playing.”

Comments:

To Big to Fail: Fits the Freddie Mac and Fannie Mae situation. Depending on your definition and how aggressively the securities and assets were price, both are close or near insolvency. The Agency's Financial Crisis is upon us now.

What about the other large mortgage originators and producers: Both Freddie and Fannie are good organizations with experienced personnel dedicated to trying to deliver good value to the consumer. How do we draw the line. Who do we support and who do we abandon. Certainly, the stockholders are getting thrown under the bus making survival a hallow victory for equity holders who own Freddie Mac and Fannie Mae.

World Wide Systemic Risk: is what we have in the Financial System. This is by design because it was very efficient and profitable to centralize infrastructure and command. Once in place, without effective regulations, you leverage the balance sheet and rake in the profits. That is until the underlining assets stops appreciating and begins a cyclical downturn.

Exit Strategy: The question is, if everyone is looking to de-leverage their portfolio and tighten up credit restrictions, is that the slow motion recipe for an even deeper economic downturn.


Jim