Busted: Bankers and The Global Economy

September 8, 2008

Billions Lost: Bailing Out U.S. Mortgages

The Freddie Mac and Fannie Mae bailout has effectively destroyed the paper value of all investments in those institutions, effectively cleaning the slate in a modified sort of bankruptcy for the mortgage twins as the federal government steps in. Billions of dollars have been lost by the banking community that was invested through common and preferred stock. The mouthpiece and supporter of the federal government, the Federal Reserve, points out hopefully that only some smaller banking institutions have stock holdings that threaten their existence.

With that in mind, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision are prepared to work with these institutions to develop capital-restoration plans to keep the system operating. The Federal Reserve will buy the stock holdings at fair market value before the bail out. The banks holding the stock must report holdings as available for sale and deducted from bank capital to complete the bailout.

In the minds of politicians and bankers, due diligence has been done. However, confidence will likely be shaken on many levels and a stock market effect is likely to be seen in a big way tomorrow as the economy adjusts to the new emotional and fiscal reality. How to restore confidence?

To make the boo-boo all better the Federal Reserve and Ben Bernanke has stepped up to the financial altar to make the following statement:

“I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies. These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets. I also welcome the introduction of the Treasury’s new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty.”

The appearance is that the “Treasury’s new purchase facility” will be through the Federal Reserve. Whether that is the ultimate truth or not, the Federal Reserve will finance it because the United States doesn’t have the cash or credit for the bailout. The federal government is bailing out Fannie Mae and Freddie Mac as well as the bankers that have invested. The taxpayer is securing all the debt for the bailout which has been predicted to run up as high as $65 billion. That is likely a conservative figure to bail out the entire mortgage and banking system. Authorities claim that the U.S. taxpayer will profit from the move. The word profit can be used in a number of ways. Doubtless, the American taxpayer will profit in regards to the current status quo. The public will be much more comfortable with the lastest plans versus total collapse of the economy because of a failed banking system. The future success of the nation depends on the future success of Fannie Mae and Freddie Mac. Too bad they didn’t see fit to rename the companies with a clean sweep, but perhaps that move was considered as too bold. 

The interesting truth is that a temporary effect of the bailout is likely to be instability rather than stability based on the old demon of fear and lack of confidence. Later today we will discover the pulse of the nation. ~ E. Manning

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