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Thursday, July 10, 2008


fannie, freddie "insolvent"

says no less a personage than a highly respected former federal reserve bank president.

Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.

the way is being prepared for outright nationalization, as john jansen and others have noted, probably along the bear stearns model which all but wiped out equity holders. per calculated risk, it's also above the fold for the wall street journal this morning. the public is being prepared through official mouthpieces, it seems to me.

poole is a longtime GSE critic.

While leading the St. Louis Fed, Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and said the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters.

but, though one can argue around the margins, the truth of what he is saying should be plain. the GSEs have been put on the path to a de facto nationalization (whether or not is is euphemized) by its reckless growth and leveraging leading up to the credit crunch. it doesn't matter what its executives say -- they would tell any lie now to avert public criticism and market skepticism.

congress will be forced to bring the GSEs back on balance sheet soon, though quite probably with an intermediate step involving a federal reserve rescue and bridge. that in itself will enable FNM and FRE to become explicit policy tools in the effort to nationalize the american mortgage market, becoming conduits for federal handouts through both availability and pricing. such a change would likely forestall some of the inevitable reversion of home prices to traditional price-to-income valuations and conditions of positive carry for investors -- though it may only exacerbate the inavailability of private credit, as was postulated by hoisington investment management this week.

UPDATE: more important than the GSE equity -- which is again being savaged, with FRE down (-25%) just today! -- is the bonds. GSE debt instruments underpin a lot of the american financial system, and they are being annihiliated this morning. per bloomberg:

The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding. In addition to those obligations, Fannie Mae has $831 billion in company bonds outstanding, while Freddie Mac has $644 billion, according to Bloomberg data.

those company bonds are on the balance sheets of every significant bank in the west.

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