Monday, September 08, 2008

The Fall of Fannie Mae & Freddie Mac

Of course from its inception, some would argue that they were doomed to failure given the moral hazard at play. The government's implicit backing opened the possibility, and now certainty, of the two firms being taken over by the government this weekend. Jim Rogers (a pessimist in recent years of US markets) suggested that the US had become more communist than China (via Club for Growth):

More from Paul Kedrosky:
Why didn't the Freddie/Fannie bailout deal wipe out the common shares? That's one question most people have, myself included, as we look at the structure of the deal. Leaving common shareholders with 20% of the equity of the firms seems unnecessarily generous
I tend to agree with Greg Mankiw's third reaction in that it's a sad day with the problems for the markets far from over:
The problem is far from over, as the future of these institutions and a large segment of the financial system is still to be determined. The worrisome part is that this future will be determined by a political system that both created the GSEs and failed to provide sufficient oversight, even when many economists suggested reform was needed. To believe that the Congress will do a good job of it would be the triumph of hope over experience.
But the bottomline impact for most of us? Nothing (Paul Kedrosky). The impact will come later. Fun times. If there's one small teeny tiny silver lining it's that both Freddie Mac and Fannie Mae as terms of the takeover must cease all government lobbying immediately. More details here (Paul Kedrosky).

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