Freddie and Fannie

Clive Crook:

US taxpayers are about to find out what their long-standing and (strictly speaking) non-existent guarantee of Fannie Mae and Freddie Mac will cost them. One way to think of it is this: take the US national debt of roughly $9,000bn and add $5,000bn. Not bad for an obligation still officially denied.

In the end, that astounding prospect might be the outcome. Partial or outright nationalisation of the housing lenders – colossal pseudo-private entities that own and underwrite US housing loans – would add some or all of their $5,000bn (€3,144bn, £2,513bn) in liabilities to the government’s balance sheet. While it is true that the agencies (unlike the government) own housing-related assets that roughly match those liabilities, the still-collapsing housing market makes this a lot less reassuring than one could wish.

Covering the agencies’ losses on their loans and guarantees is going to require an actual outlay, which will fall on taxpayers. You could plausibly call the rest – namely, bringing these “government-sponsored enterprises” explicitly inside the public sector – just a bookkeeping entry. But what an entry! It would surely shake financial markets, raise the government’s cost of funding and put heavy downward pressure on the dollar.

I get it until the last part of that last sentence. As a general rule we expect markets to process all available information (yes, I know, more in the breach etc) and  to react only to new such.

As that $ 5 trillion has always been implicitly guaranteed by the US Treasury (yes, implicitly, not explicitly) is there in fact anything very much that is changing here? Is it in fact just a book keeping exercise that doesn\’t change the real debt position at all? And if it is that, why should either Treasury borrowing costs rise or the dollar tank (further)?

7 thoughts on “Freddie and Fannie”

  1. Exactly. It is not a coincidence that share prices of banks, estate agents, property developers, property investment companies etc. have been sliding since early 2007, months before the phrase ‘credit crunch’ entered popular consciousness.

  2. So Much For Subtlety

    Wouldn’t the markets have included the risk of adding $5 trillion, not the 5 trillion itself? Up to now they would have guessed that there was, say, on average, a 50:50 chance of the State being stuck with the full $5 trillion and so only counted the State being liable for $2.5 trillion?

    To go from a risk for the full amount to the full amount is not a trivial step. I mean it is the only thing that keeps most banks afloat.

  3. Anyone any idea of the worth of the united states government, assets ect, land (esp all that loverly co2 trapped underneath) military bases, buildings ect?

  4. Everyone thought F&F had quality assets with little risk. Now it looks as if they had relaxed their lending rules increasing risks. Thus higher borrowing costs.

  5. “Anyone any idea of the worth of the united states government”

    Aside from the obvious quip, the Government’s worth includes the value of a never-ending revenue stream, a growth-linked annuity if you will.

  6. We might ‘expect’ markets to take account of Fannie and whits-his-name’s exposure, but in fact most market players are humans, not cleverer than the rest of us, and driven mostly by a heady mix of fear and greed. This is why the anthopomorphic market can be spooked and has sentiments. It is not perfectly rational as the model suggests. In fact it is open to excessive optimism and a lack of foresight. So it makes sense to say that ‘the market’ will react badly if the Feds take over the debts.

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