Thread: Things looking bad for Fannie Mae

http://online.wsj.com/article/SB1215817 ... lenews_wsj

Fannie Mae Ugly
July 12, 2008; Page A10
Investors continued to flee Fannie Mae and Freddie Mac yesterday, almost as frantically as the political class tried to reassure everybody there was nothing to worry about. Allow us to sort the good (there isn't much) from the ugly.

In the good category, Treasury Secretary Hank Paulson swatted back reports of a government "nationalization" of the companies – which would mean making explicit what has long been an implicit taxpayer guarantee of their liabilities. This would instantly add $5 trillion in liabilities to the federal balance sheet, doubling the U.S. public debt burden and putting America's AAA credit rating at risk. This is the nightmare scenario for taxpayers.

Less reassuringly, Mr. Paulson said, "our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission." This suggests that Treasury thinks the two companies have enough capital, or can raise enough in private markets, to ride out any mortgage losses. We're not so sure, and neither are investors, who have kept bidding Fan and Fred shares to new lows on fears of insolvency.

The most immediate danger is that investors will shrink from rolling over the debt of the two companies, leading to a run a la Bear Stearns. Mr. Paulson is trying to reassure people that the companies are sound, but after Bear everyone has the heebie-jeebies. With so much on the line, we've been suggesting that Treasury and Congress step up now with a public capital injection to help the companies ride out their losses.

Yes, this would mean putting some taxpayer cash up front, but in the cause of avoiding the far greater risk of a collapse or Bear-like run. If the capital injection was made in the form of a subordinated debt or preferred stock offer, taxpayers would get a stake in the companies and some return on their investment once the crisis passes.

We haven't suddenly become socialists. What taxpayers need to understand is that Fannie and Freddie already practice socialism, albeit of the dishonest kind. Their profit is privatized but their risk is socialized. We're proposing a more honest form of socialism, with the prospect of long-term reform.

In return for putting up the cash, the taxpayers would also need some reassurance that this Fan and Fred debacle couldn't happen again. Thus their regulator would need the power to shrink their portfolios of mortgage-backed securities that have made them such high-risk monsters, and ultimately to wind the companies down. Apart from outright failure, the worst scenario would be a capital injection that left the companies free to commit the same mayhem all over again two or 10 years from now.

Now we get to the ugly: Congress. On Friday, Senate Banking Chairman Christopher Dodd (D., Conn.) declared that Fannie and Freddie are "fundamentally strong," that fears about their capital are overwrought, and that "this is not a time to be panicking about this. These are viable, strong institutions." Yet he also said that one option under discussion is to let the two companies borrow from the Federal Reserve's discount window.

In other words, Mr. Dodd says the companies are so safe that the Fed may have to rescue them. What he really wants to do is to pass the buck – literally – to the Fed so he and Congress don't have to appropriate taxpayer money up front. Opening up the window would nonetheless be a giant step toward an explicit taxpayer guarantee of Fannie and Freddie debt. It would further poison the Fed's balance sheet, not to mention get it tangled up in the politics of the mortgage markets in a way that would jeopardize Fed independence.

And speaking of ugly, yesterday's markets showed one more nasty side effect of the Fannie Mae panic: fear of rising inflation. Gold popped by $23 an ounce, and at $965 is back at the heights it reached during the March run on Bear Stearns. Oil also bounced up as the dollar fell, a sign that investors think the Fed will react to the Fannie fears by delaying any monetary tightening even longer than it already has.

If there's any other good news in all this, it is that the scandal of Fannie and Freddie is at last coming into public focus. The Washington political class has nurtured and subsidized these financial beasts for decades in return for their campaign cash and lobbying support. Wall Street and the homebuilders also cashed in on the subsidized business, and also paid back Congress in cash and carry.

The losers have been the taxpayers, who will now have to pay the price for this collusion. Maybe the press corps will even start reporting how this vast confidence game could happen.

Indie Mac went belly up. A large bank. FDIC is insuring the customers.

I HATE TO EVEN BRING THIS UP....BUT IF MANY BANKS FAIL WILL FDIC BE ABLE TO COVER ALL DEPOSITORS?

If I see another bank go under. I'm pulling all of my money out. It's not making any interest anyway. Just put it in a safe deposit box.