Freddie-Fannie Takeover: Good news or Bad News?

Posted by: Michael Mandel on September 07

With Freddie and Fannie apparently about to be bailed-out/taken-over by the government, is this good news or bad news for the economy and the markets? Back in July, when Paulson first asked for bailout authority, I suggested that nothing would really happen until the next president took office in January. Obviously I was wrong. What happened, at least according to this morning’s news, is that Paulson’s hand was forced by accounting trickery at Freddie and to a lesser extent Fannie.

That brings up a lot of questions. But the question for this morning: Does this tell us anything that we didn’t already know about the state of the economy and the housing market? It really depends on whether they were hiding subprime losses, or losses in the prime mortgage market. If they were hiding subprime losses, then it’s simply more of the same. If they are hiding prime losses, where they are the major player—that’s a horse of a different color.

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Reader Comments

Eric

September 7, 2008 12:12 PM

Whenever Poulson says something will not happen ("Fannie and Freddie don't need our help"), it happens. Consistently. In his press talk he said this does not reflect on other financial institutions. Uh oh - I presume that means many other banks are also doing funny accounting and are similarly de facto bankrupt.

Jerry

September 7, 2008 05:55 PM

I don't believe it's about accounting fraud. It seems more likely the holders of the GSEs' debt, China and all the others have gotten extremely nervous that Paulson was going to act. Even though the USA is not obligated legally if we don't guarantee the debt we'll lose these creditors. And we need them desperately.

norman ravitch

September 8, 2008 10:27 AM

Our politicians, our pundits, our reverend clergy -- all tout the wonders of capitalism and the evils of socialism -- until capitalism hurts. Then they suddenly become socialists -- or perhaps we should state capitalists which is the same as fascists.

Mike Reardon

September 8, 2008 02:32 PM

The takeover of Freddie and Fannie are being called socialists when it’s closer to an FDIC for investors portfolios. Not a socialist gift but a capitalistic gifting.

That gift of exponential home debt to the next Administration could have been expected from the Bush Administration its also a gift Reagan left at the end of his Administration.

A larger portion of the budget will be made of debt service of both the present National Debt + a FF Debt to be determined.

Its impact will be making it harder to sell debt for a universal National health care program or any other large commitment that could have been productive. People forget what Reagan left at the end of his Administration.

Brandon W

September 9, 2008 08:33 AM

I think this was a strong indicator of how bad things really are. This was a drastic step and it would only have been taken if the situation were dire.

Brandon W

September 9, 2008 02:46 PM

I love the following from a known author:
" The housing market is not coming back. Ever. In the form that we knew it. The suburban project is over. That version of the American Dream is over. We'll be a lot better off if we put aside dreaming altogether for a while and start focusing on reality instead -- that part of the day when we're awake and capable of actually doing things. We've got a lot to face and a lot to do.
The government takeover of Fannie and Freddie is just another papering-over of our fundamental problem -- that until we embark on new ways of being a nation, of living differently and working differently on different things, the other nations of the world will not have confidence in us, or the paper we issue, and we will not really have confidence in ourselves."
- JH Kunstler, http://kunstler.com/

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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