Would a government bailout of Fannie Mae and Freddie Mac put even more downward pressure on the U.S. Dollar?
*CNNMoney, by Katie Benner, July 10, 2008:
“Here's a scary, and relevant, question to ponder as the housing
market continues to slide: What would it take for the government to
step in and help Fannie Mae and Freddie Mac, and how would a rescue
affect you, the taxpayer?
It's been a brutal week for Freddie (FRE, Fortune 500) and Fannie (FNM,
Fortune 500). A Lehman analyst report Monday kicked off a stock rout
that had shares in both mortgage lenders hitting fresh multi-year lows
Thursday. Freddie was down 19% in afternoon trading; Fannie was down
more than 10%.
The stock plunge, together with Fed Chairman Ben Bernanke's downbeat
housing outlook on Tuesday, is forcing investors to consider what would
happen if a bailout is needed - a prospect raised Thursday when William
Poole, the former president of the St. Louis Federal Reserve, told
Bloomberg the companies are already ‘insolvent.’”
“Clearly, investors are concerned. Credit default swaps - a kind of
insurance against the possibility of Fannie and Freddie defaulting on
their corporate bonds, are at their most expensive levels in 14 weeks;
both companies are expected to report steep losses for the second
quarter; and their main business, mortgage securitization, is under
pressure as home price values decline and foreclosure numbers rise.
‘The major issue is that these are very leveraged financial
institutions, leveraged much more than any other bank, and they have
lots of mortgage assets. As real estate values decline every day, the
value of [the mortgages that it bundles, guarantees, and sells] are
called into question,’ says Dalton Investments co-founder Steve Persky,
who has been focused on distressed mortgage assets.”
“The Federal Reserve and the Treasury have taken great pains to point
out that the government is not obligated to bail out either Fannie or
Freddie if they face insolvency.
It's debatable where the legal obligations lie, but as a practical
matter, the government can't let these institutions fail because they
are being counted up on to help fix the mortgage mess. If Fannie and
Freddie were unable to buy and back loans, banks would stop originating
them and the pool of homebuyers would shrink, causing home prices to
fall even further.”
“In an April report, Standard & Poor's said an Armageddon scenario
whereby Fannie and Freddie are insolvent is unlikely, but that the mere
possibility of failure at either is a greater threat to the economy
than the actual collapse of any investment bank.”
“The doomsday scenario could cost taxpayers more than $1 trillion, says
the S&P report. The report went so far as to say that a government
bailout of Fannie or Freddie could force the agency to lower its rating
on the creditworthiness of the United States.”
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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