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Freddie Mac and Fannie Mae – US goverment takeover.

Posted by Adrian on September 9, 2008

The amazing aspect of Treasury secretary Hank Paulson’s press conference and the unveiling of a complete take over of Freddie Mac and Fannie Mae by the US government on Sunday the 7th September 2008. Was in light of what occurred with the markets on Friday 5th September 2008 – in which the market was in ‘risk aversion’ refer to Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan (Asia), Spain, Iceland, Australia – (update 10). Is Asia facing a economic meltdown? China’s central bank under strain?, the whole market was dumping high risk currencies, stocks everything connected to debt related risk. It was a significant day, as one could see how a major sell off (particularly currencies), can alter the value of an asset dramatically (causing anyone holding those assets to sell). Then the Freddie Mac and Fannie Mae press conference on Sunday with Treasury secretary Hank Paulson announcing the US government would take over or “conservatorship” the mortgage bank giants. Although the market had factored this in weeks ago, the point is the major indices/currencies were so sold off on the 5th September 2008, that any “good” news; even it was yesterdays news caused a rally and had the market fall back into risk appetite. The amusing part is treasuries tanked (has since recovered) on news that the take over is final and when the US markets opened on Monday 8th September 2008, stocks soared (Dow gained 290.43 points), but both Freddie and Fannie stocks went south.

Dow and Nasdaq compared with Freddie Mac and Fannie Mae stocks

Treasuries 2yr yield (I yr graph)

The Freddie and Fannie ‘take over’ has been discussed on numerous blogs by numerous people, so I won’t go into the moral semantics of the issue. Except to say apart from taxpayers footing the bill (without consultation with the public, but sanctioned by all US leaders – including Barak Obama), the risks of allowing the US government to take over the mortgage giants are far more dangerous economically, than allowing the banks to go bankrupt and redirecting assets elsewhere. The treasury and US government have now added more risk to their balance sheet; the taking over of insolvent entities, will not stop a depreciating US property market, as long as you have weak employment, banks foreclosing, company defaults, the continued tight credit markets and a shaky US dollar and inflation; the Freddie and Fannie market euphoria could be very short lived. So back on the table will be the depreciating US Dollar and inflation in the markets and it has to be noted that a US ‘recession’ will not be mild with high inflation. It will be inflation which will be the killer for the US economy in which the Federal Reserve and Treasury/US government do not seem to be concerned with the inflation issue – by allowing the US government to rake up far too much risk. Will put too much pressure of the USD with any hope that the Fed will increase rates diminishing.

Like the Bear Stearns rescue on the 15th March 2008, the markets got a respite and there was talk of normalization in the credit markets, although this was short lived and the credit markets are still contracting.

So, the risks are numerous with the tax payer footing the bill for this bailout. Bond holders of Fannie and Freddie debt may have some reprieve, but I doubt treasury notes will sustain a higher yield solely from US government guarantees.

Major players holding mortgage debt, say China and and it’s mass of US treasuries must be watching this very closely. The stock rallies are superficial under the massive bailout of GSE (Government sponsored entities – Freddie and Fannie). Still, I think the pricing of assets (Freddie and Fannie) is going to get messy and hard to price. Some asset sell off’s may occur in the future, so I wonder how much will eventually remain in government hands?

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2 Responses to “Freddie Mac and Fannie Mae – US goverment takeover.”

  1. […] . If Treasuries tank and the USD starts to melt refer to (with real time graph – Treasury Notes) Freddie Mac and Fannie Mae – US government takeover, there will be a capital flight out of America unprecedented in history. I think if the Fed does […]

  2. I follow your blog for a long time and should tell that your articles are always valuable to readers.

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