Sunday, July 13, 2008

Congrats! You (and the rest of the taxpaying public) just bought some FNM and FRE...

Fannie Mae and Freddie Mac have struggled recently as a result of weakening credit around the country. Real estate markets from CA to Florida are in steep decline and the increasing defaults has weakened the status of mortgage finance companies including Fannie and Freddie.

Their equities have been a disaster over the past 12 months but the real fear was coming tomorrow morning. Freddie has a $3 billion offering set that was meeting with lukewarm response on Wall Street. The thinking was that if the offering failed it could trigger a series of financial dominoes that might create a widespread financial panic.

In steps the US Treasury to extend a special line of credit to Fannie and Freddie, no big deal. Then the US Treasury announces a plan to purchase equity in the two companies if need be, that's a big deal. It's unclear how much the Treasury is willing to buy, but the fact that they US Government is effectively acting as a backstop to equity investors (AGAIN - SEE Bear Stearns 4 mths ago) is a big deal.

Separately, the White House asked Congress to boost the National Debt Limit again.

Borrowing from foreign investors to support over-leveraged financial firms holding assets that are declining in value is not a prudent long-term fiscal strategy IMHO.

The next time you fill up your car and gas hits $5/gallon remember it's not because of rising oil demand, but rather the weakening US Dollar. Actions like this move by the US Treasury continue to weaken the US Dollar.

Cheers.

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