Saturday, September 06, 2008

Largest Gvt bailout in history - largely unannounced

Yesterday, I read a small WSJ report announcing that the Treasury was close to finalization on rescue plans for Fannie and Freddie... We all knew this was coming, but why was this not headline news during the day? hmm...

Well, at least after market traders understand the implications:

Washington's Fannie And Freddie Plan: Why Now?

Fannie Mae and Freddie Mac, the mortgage finance giants that fund half the U.S. housing market, are about to become subsidiaries of the U.S. government.

The Treasury Department late Friday was putting together final details of a plan to take the two into conservatorship, effectively a government takeover, at a potential cost of tens of billions to taxpayers.

Reports circulating Friday night have the two companies entering conservatorship, which would nearly wipe out equity holders but preserve the interests of debt holders. The chief executives of both companies would lose their jobs, but the companies could continue to operate, with quarterly infusions of capital from the Treasury depending on losses.

After hours, shares of Fannie Mae dove 25%, and Freddie Mac plunged more than 27% after both had risen sharply before the end of regular trading.

Closing thoughts:

Though details have yet to be released, I imagine the ramifications will be felt hard next week.

As I see it, there are still several huge unanswered questions:

1) Is this merely the opening salvo for more rescues to come (FDIC, PBGC, Big 3 Auto, etc)
2) Will this be an open-ended bailout
3) How much will this cost the US taxpayer and how will we ever pay for it
4) What are the longer-term consequenses to our country's debt rating
5) How will this impact the US Economy and Dollar?


Regards

Randy

4 Comments:

At 9/06/2008 12:14 PM, Anonymous Anonymous said...

can this take gold to $1200.

 
At 9/06/2008 1:45 PM, Blogger FOFOA said...

Here are my answers:

1) Is this merely the opening salvo for more rescues to come (FDIC, PBGC, Big 3 Auto, etc)

Yes. Too big to fail was always a myth, now it is real.

2) Will this be an open-ended bailout

In some ways yes, in others no. The main goal is to continue feeding the hungry credit monster that is the US economy. Shareholders be damned, and in the final analysis, debt holders be damned too.

3) How much will this cost the US taxpayer and how will we ever pay for it

Easy. We will hyperinflate the debt away. We are in a precarious balancing act right now between a major collapse or deflationary depression, and run-away inflation. The Fed has made it clear that they favor the latter and will continue in that direction.

4) What are the longer-term consequenses to our country's debt rating

Short term, the morons around the world will see this as a positive. Long term our rating will be not much better than Zimbabwe.

5) How will this impact the US Economy and Dollar?

Short term, the dollar will probably rally. It seems to rally on anything these days. Long term, see here and here.

 
At 9/06/2008 1:52 PM, Blogger FOFOA said...

And for anyone who hasn't read it yet, this is a must-read report from John Williams of ShadowStats.

 
At 9/07/2008 7:30 AM, Anonymous Dave said...

It's funny how we vehemently criticize Russia and Venezuela when they nationalize companies, yet when we do it, nary a peep.

What baffles me is how the U.S. Government is able to keep monetizing debt like this, and yet the dollar goes up! Is nobody paying attention to the hundreds of billions of dollars being manufactured to pay for all these bailouts?

Dave

 

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