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  Monday   July 14   2008

economy

Treasury Acts to Shore Up Fannie Mae and Freddie Mac


Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.

In a separate announcement, the Federal Reserve said it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”

An official said that the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.

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Fannie Mae and Freddie Mac Nationalized


Markets will open tomorrow with news that the federal government has effectively taken over both Fannie Mae and Freddie Mac, and extended a lifeline as well to the Federal Home Loan Banks.

The U.S. Treasury Department, through its secretary Henry Paulson, describes its rescue plan as “not a nationalization”, but let’s not be fooled here. The federal government is substantially widening its line of credit to both Fannie Mae and Freddie Mac, it is injecting $15 billion of new equity into the companies, and the Federal Reserve has opened the discount window to both agencies so that they can borrow at the 2.5% overnight rate.

Anytime the federal government buys shares in a company, even if it is a special type of new share created for this purpose, that company has been nationalized. The board of directors and management of the company have lost control, and in this case the Federal Reserve has been given new powers of oversight over the agencies, in yet another expansion of Fed regulatory control.

This is a very similar package to the rescue of Bear Stearns, only the white knight buying the distressed financial companies is the federal government. As with Bear Stearns, all of last week’s assurances by the government that Fannie Mae and Freddie Mac were well-capitalized and safe have proven to be ludicrously false. Obviously the companies are insolvent if the government has to go to such lengths to shore them up.

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Event Horizon
by Jim Kunstler


There's a particular moment known to all Baby Boomers when Wile E. Coyote, in a rapture of over-reaching, has run past the edge of the mesa and, still licking his chops and rubbing his front paws in anticipation of fricasseed roadrunner, discovers that he is suspended in thin air by nothing more than momentum. Grin becomes chagrin. He turns a nauseating shade of green, and drops, whistling, back to earth thousands of feet below, with a distant, dismal, barely audible thud at the end of his journey. We are Wile E. Coyote Nation.

Is there anyone in the known universe who thinks that the US financial system is not fifty feet beyond the edge of the mesa of credibility?

Nothing will avail now. Not even if Sirhan Sirhan were paroled at noon today and transported directly to the West Wing with a .44 magnum in each hand (and a taxi driven by the Devil waiting outside to take him to the US Treasury and the offices of the Federal Reserve).

It's hard to imagine what kind of melodramas were unspooling on the Hamptons lawns this weekend, while everybody else in America was watching Nascar, or plying the aisles of BJs Discount Warehouse for next week's supply of mesquite-and-guacamole flavored Doritos, or having flames and chains tattooed on their necks, or lost in a haze of valium and methedrine.

With the death of the IndyMac Bank last week, and the GSEs Fannie Mae and Freddie Mac laying side-by-side in the EMT van on IV drips, headed for the Federal Reserve's ever more crowded intensive care unit, there was a sense of the American Dream having passed through the event horizon that denotes the opening of a black hole.

What would happen if the US Government acted to bail out these feckless enterprises (and what if they don't)? Either way, it's not a pretty picture. If Mr. Bernanke does start shoveling loans into the GSE black hole, he'll further undermine the soundness of his own outfit and do nothing, really, to repair Fannie and Freddie's structural problem of having securitized too many loans that will never be paid back. If instead Fannie and Freddie are flat-out taken over entirely by the US government (and remember the Federal Reserve is not the government), then the national debt will roughly double overnight -- which will pound the US dollar down a rat-hole.

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 09:02 PM - link