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We're All Homeowners: Nationalization
of Fannie, Freddie Unavoidable
Aaron Task in
Investing,
Recession,
Banking, posted at
finance.yahoo.com 07/08/08
Fears about Fannie Mae and Freddie Mac
retreated somewhat Tuesday after their
federal regulator,
OFHEO Director James Lockhart, said
new accounting rule changes should
make "no difference in the risks of
the two firms."
On Monday, Freddie and Fannie shares
plummeted after a
Lehman Brothers analyst said a new
FASB rule could require the two firms
to write-down as much as $75 billion.
Rather than the accounting rules,
what's really got investors spooked is
a growing realization the government
will have to
nationalize Fannie and Freddie,
says Kevin Depew, executive editor of
Minyanville.com.
The two mortgage lenders are simply
too big to fail and too
critical to the housing market, Depew
says. Given Fannie and Freddie own or
guarantee 50% of all housing debt,
according to the WSJ,
continued stress on their balance
sheets means higher borrowing costs
for the firms, and ultimately higher
mortgage rates for individuals. It
also means another round of
write-downs for
the battered financial sector
generally, which owns a lot of Fannie
and Freddie-backed paper.
But nationalizing the firms, each
created by an act of Congress, would
mean a wipeout for equity holders, who
have already seen their
holdings decimated in the past year.
The nationalization of Fannie and
Freddie and would put U.S. taxpayers
on the hook for the socialization of
the housing market, but Depew says
we're already there whether we know it
or not.
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