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Has the seizure of Freddie and Fannie affected the national debt? PDF Print E-mail
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Friday, 12 September 2008 12:21

I have been waiting for the following topic to be raised somewhere in the media, perhaps it has and I missed it, but since Freddie and Fannie have been put into conservatorship by the Federal Housing Finance Agency, I think and argument can be raised that the national debt has grown substantially.  The two combined guarantee about $5 to $6 trillion in loans.  The current debt ceiling, not counting Freddie and Fannie, is $10.6 trillion.  It's probably not a big deal, since this new debt is backed, for the most part, by pretty sound assets.  There's only a small portion of the Freddie/Fannie portfolio that is problematic.   Nonetheless, the debt has grown.  I suspect that it's something that will inevitably increase the cost of borrowing for the US government.

I want to comment about the timeline leading up to the "seizure" of Freddie and Fannie; for me, it sheds light on what's going to happen to WaMu and also, perhaps to Sovereign Bank.  After the IndyMac Bank seizure on July 11 shocked the system and devastated the value of many companies, the government moved in on July 13 in an effort to shore up the two GSEs; Paulson made an announcement of the actions that would be taken and the Fed supported his position.  The problem that the GSEs faced is that their stock slumped and it was pretty clear that raising more capital was not going to be possible.  Congress moved quickly and drafted the Housing and Economic Recovery Act; it passed on July 24, that's 11 days after the IndyMac seizure.  It was signed into law on July 30, 2008 by President Bush.

This new law created the Federal Housing Finance Agency (FHFA); it also gave the FHFA more regulatory authority over Fannie and Freddie.  So, what I observe is the government knew what was likely to happen and got the necessary regulatory authority and entity in place to seize the two GSEs if and when that became necessary.  Given the rapidity at which the Congress moved, if was more when than if!

If WaMu were going to be seized, I'd bet that the FDIC would want to explore other options.  For example, the sale of the performing assets of the bank to some going concern(s), then the liquidation of the residue.  Looking at WaMu, I am not surprised by the rumors today of a takeover of some assets.  Carving up WaMu is probably the best thing for everyone.  If it happens, it will occur behind the scenes.

I can't wait for the made-for-TV movie!

 

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