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The share prices of Freddie Mac and Fannie Mae, those curious US mortgage organisations for which there is no equivalent in Europe, have plunged in the past few weeks. But that doesn't mean that the FM twins are going to go tits up. What it (possibly) means is that they are going to have to be bailed out by the US government, which will mean an effective dilution of equity so severe that current equity holders in FM/FM might as well use their share certificates as toilet paper.
Fannie Mae, the Federal National Mortgage Association, is the oldest of the pair, dating back to 1938 "to help the housing market" (sound familiar?) Fanie Mae took on its strange "Government Sponsored Enterprise" (GSE) status in 1968, becoming publicly listed and situating itself half-way between private enterprise and public entity. Ironically, Freddie Mac was created in 1970 because the same worries currently being expressed in the UK about Northern Rock having an unfair advantage were expressed about Fannie Mae's privileged position. The obscure solution to this was to create another GSE with a privileged position.
Since then the two operations have exploited this presumed government guarantee mercilessly and, now, with dire consequences. Any comparison between the solvency levels of financial institutions in (in order) Japan, Europe, and the US would have the two FMs parked firmly at the bottom. Between them, they have debt and guarantees on mortgages of five trillion dollars. That's (if my maths are correct) nearly $20,000 for every man, woman and child in the US. Its core capital, sounding so solid at $75bn, sounds less solid when expressed as 1.5%. This is less than a fifth of the number one would like to see in Europe.
Worse, the two FMs were given permission by Congress to shore up the US mortgage market in the vague hope that the crisis was merely one of liquidity. This move was, in a way, government intervention wthout looking like government intervention. Now, however, the supporters are themselves in trouble, and the US government has nowhere to turn but itself (i.e., the taxpayer).
Governments in the past few years have had an easy time of it, relying on the private capital markets to come up with funding (it was a core strategy of the Brown years -- get private capital to pay for infrastructure while he set fire to fifty pound notes on consultants in the health service). But now there is a capital shortage. Which means that the money, if it is to arrive at all, either has to come from the taxpayer now or (more likely) from the taxpayer in the future at a usurious interest rate. That is achieved by issuing bonds and gilts at firesale prices.
If governments take the latter option, they will be loaded up with a lot of debt that they don't particularly want to pay. How can they reduce the size of this debt in real terms?
Yep, you've got it again. Inflation.
++++++
Bad luck to Mr Purle, out in 171st place in the ME, for what must seem like a kick in the teeth $38k. The Camel is still hanging in there for day six, but v short-stacked. Could this be the year of the Matusow? And, if he wins it, how much of the money would he get to keep?
__________________
Fannie Mae, the Federal National Mortgage Association, is the oldest of the pair, dating back to 1938 "to help the housing market" (sound familiar?) Fanie Mae took on its strange "Government Sponsored Enterprise" (GSE) status in 1968, becoming publicly listed and situating itself half-way between private enterprise and public entity. Ironically, Freddie Mac was created in 1970 because the same worries currently being expressed in the UK about Northern Rock having an unfair advantage were expressed about Fannie Mae's privileged position. The obscure solution to this was to create another GSE with a privileged position.
Since then the two operations have exploited this presumed government guarantee mercilessly and, now, with dire consequences. Any comparison between the solvency levels of financial institutions in (in order) Japan, Europe, and the US would have the two FMs parked firmly at the bottom. Between them, they have debt and guarantees on mortgages of five trillion dollars. That's (if my maths are correct) nearly $20,000 for every man, woman and child in the US. Its core capital, sounding so solid at $75bn, sounds less solid when expressed as 1.5%. This is less than a fifth of the number one would like to see in Europe.
Worse, the two FMs were given permission by Congress to shore up the US mortgage market in the vague hope that the crisis was merely one of liquidity. This move was, in a way, government intervention wthout looking like government intervention. Now, however, the supporters are themselves in trouble, and the US government has nowhere to turn but itself (i.e., the taxpayer).
Governments in the past few years have had an easy time of it, relying on the private capital markets to come up with funding (it was a core strategy of the Brown years -- get private capital to pay for infrastructure while he set fire to fifty pound notes on consultants in the health service). But now there is a capital shortage. Which means that the money, if it is to arrive at all, either has to come from the taxpayer now or (more likely) from the taxpayer in the future at a usurious interest rate. That is achieved by issuing bonds and gilts at firesale prices.
If governments take the latter option, they will be loaded up with a lot of debt that they don't particularly want to pay. How can they reduce the size of this debt in real terms?
Yep, you've got it again. Inflation.
++++++
Bad luck to Mr Purle, out in 171st place in the ME, for what must seem like a kick in the teeth $38k. The Camel is still hanging in there for day six, but v short-stacked. Could this be the year of the Matusow? And, if he wins it, how much of the money would he get to keep?
__________________
