White House announces Fannie/Freddie bailout

Posted Jul 13th 2008 8:45PM by Peter Cohan
Filed under: Market Matters, Federal Natl Mtge (FNM), Headline News, Housing, Federal Reserve

The New York Times reports that the White House has announced a plan which it will propose to Congress to bailout Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). So the executives at these companies will get to keep their millions in compensation and we will be on the hook for their mistakes. This is the what free markets mean for this White House -- private profits and socialized losses.

Here are three key terms of the deal:

Buy stock and let the Treasury finance short-term needs. The U.S. will buy billions in Fannie and Freddie stock and lend to the companies to meet their short-term funding needs.
Provide emergency Fed funds. The Fed will provide Fannie and Freddie emergency access to its discount window as it has done already for the investment banking industry. Under this deal, the Fed will open a lending facility for Fannie and Freddie which they will access by posting their own securities as collateral.
Raise the national debt. The White House will also call on Congress to raise the national debt limit -- it has already risen from $5 trillion to $9.5 trillion during the current administration.

The taxpayers of America are now on the hook for $5 trillion worth of mortgages thanks to catastrophic mismanagement of the economy. Our only hope for a recovery of the risk we are taking is that government ownership of Fannie and Freddie stock will overwhelm the selling power of those who are short the stock. If Fannie and Freddie recover, the government may one day have a meaningful profit. Otherwise it is just throwing good money after bad.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Tags: bailout, fannie mae, FannieMae, fnm, fre, fredd, freddie mac, FreddieMac, inthenews

Print this

Reader Comments (Page 1 of 1)

7-13-2008 @ 10:01PM

theword said...

This government believes that problems get resolved by printing money. I presume that Mr. Paulson's job now is one of making sure there is enough paper and ink at the Treasury. Tax payers can't pay for this so ... welcome Inflation! There was never a time before Mr. Bush that this country came closer than ever to become a Banana Repuplic. The time between these ill-based decisions and judgement day is nearer than you think. Kiss the US dollar good bye!

7-25-2008 @ 10:59AM

mike said...

If congressmen used their own money to bail these companies out It wouldn't matter, but they are using my tax dollars to bail these over paid clowns out of thier mistakes. Oh yea it is getting close to the Yearly bonuses,and these CEO's can not really justify thier big assed bonus without showing a profit even if the American working man is having it shuved up his but and there is the door if he doesn't like it.Send the ceo's a message and stop rewarding bad management.