Busted: Bankers and The Global Economy

August 26, 2008

Mortgage Twins Suffering Corporate Death

For many weeks, economists have been looking for the decline of Fannie and Freddie. It’s only been a matter of time and confidence. Central bankers unloading and refusing to buy the usual amounts of stock have put the the U.S. mortgage twins in a world of hurt.

Then, there is the nationalization theory, which would put all stockholders out in the cold; hence the concern of central bankers and now most investors, almost forcing the federal government to play the bailout hand for Fannie Mae and Freddie Mac.

A number of banks own large chunks of the $36 billion in invested preferred shares in the twins. J.P. Morgan is the largest, holding $1.3 billion currently. These banks have already lost about half the value in these shares and face losing the remainder, especially with the prospect of nationalization. Unhappily, some smaller banks could be wiped out or at least face capitalization issues.

The bottom line is that it is in the interest of the U.S. Government to bail out the preferred shareholders to avoid an enhanced banking crisis. This is a temptation, although not popular among many, especially those with bailout envy. The problem with bailouts is that once you commit to one, picking and choosing becomes a political issue. That is exactly what the government doesn’t want in an election year. Either way, bailouts are the watchword of this ailing economy because of overcommitment by the U.S. Federal Government. ~ E. Manning

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