This post is a little technical but I will try and make it easy to understand. Fannie Mae and Freddie Mac, at the behest of the government, have become the lender of last resort for the failing housing market. In the process they are ringing up billions of dollars in losses. No problem though because they buy insurance to protect them from these losses. Okay, one problem, the insurer is essentially bankrupt having liabilities way beyond what they can afford. However, the credit rating agencies have not downgraded the insurer because everyone knows that if they do, Freddie and Fannie will implode. Solution? Allow the charade to continue by making sure the credit rating agencies do not downgrade the insurer and exempt Fannie and Freddie from following the same accounting rules as everyone else. Voila! Problem solved.
Not really, it will eventually make Freddie and Fannie into zombie companies. Failing, under-capitalized, and in huge holes of debt that everyone understands but will not admit for purposes of keeping the mortgage merry round going.
3 comments:
Hey Uncle John,
Good post. How dire is the economic situation for our country? Do you think we can extract ourselves from this mess?
By the way, I wrote an open-ended post on my blog about the effect of the troop surge in Iraq. Would you mind dropping a comment or two about it? I think you can get to my blog by viewing my profile.
Aaron
Reuters had a good article stating that this mess coupled with the rise in foreclosures (which haven't fully impacted the market yet) will drive the US housing market into a deep depression. I don't think we are out of the woods yet.
Hey Aaron, thanks for posting. I think the economic situation is very dire and will affect us all for at least the next decade, if not more! But then no one ever accused me of being a pollyanna.
IndyMac Bank failed and I think there will be more to come. And I guarantee that Freddie Mac and Fannie Mae will endure some form of government bailout. Right now they are insolvent according to Generally Accepted Accounting Practices, but the government just doesn't want to acknowledge it.
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