Bailout Watch 26: Feds Take Over Fannie Mae and Freddie Mac

by Robert Farago

Published: September 5th, 2008

bailout watch 26 feds take over fannie mae and freddie mac

The Washington Post reports that Uncle Sam is set to take yank the chain of Fannie Mae and Freddie Mac. “The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives, and use government funds to prop them up, government officials told the two companies yesterday, according to sources familiar with the conversations.” It’s a bailout, but not as we know it. “Under the plan, the federal government would place the firms in a legal state known as conservatorship, the sources said. The value of the company’s common stock would be diluted but not wiped out while the holdings of other securities, including company debt and preferred shares, would be protected by the government.” To avoid sticker shock, the feds will “invest” your money in stages. “Instead of giving each company a big capital infusion up front, the government plans to make quarterly infusions as the companies’ losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.” Clearly, this is the template for the “real” Detroit bailout, once they piss-away $50b in federal low-interest loans. Either that, or it will lead to “bailout fatigue” that will torpedo the D2.8’s chances of taxpayer rescue.

Robert Farago

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4 of 26 comments

Mimizhusband on Sep 07, 2008

This is the moment to reduce the influence of the government in housing, but instead the Feds are increasing it. When the loan amounts covered should slowing by going down to cover only the least expensive of entry-level homes, now the massive loans are being covered by... basically the value of the currency. Everyone paid in dollars is footing this bill. Too bad I can't be paid in Euros, I might be able to buy that BMW my daughter wants, and go to Europe for vacation to see it role off the assembly line. As it is, my worthless dollars mean she drives our used Sienna to school. The Horror! I hear about it from her every day.

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Pch101 on Sep 07, 2008
The fact that you think as much is all they need to scare you into opening you wallet and giving more and more of YOUR money to help others. You're just factually wrong. Most of the US mortgage market runs through Fannie and Freddie. That ultimately feeds much of the US' GDP growth, for it is heavily dependent upon consumer spending. I would personally like to downshift their involvement in the markets over the long run, as they certainly helped to create the bubble that is bursting as we speak. But over the short run, we are headed for a cliff, and the feds have no choice but to intervene. Not for their sakes, but for ours. Once upon a time, the government assumed an ostrich approach to these matters. That head-in-the-sand denial created the Great Depression. They are trying to avoid that again, and that's the responsible thing to do. Anonymous internet ideologues are not going to step up to fix the gaping hole when their theories prove not to be true.

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Mel23 on Sep 07, 2008
Once upon a time, the government assumed an ostrich approach to these matters. But with the repeal of the Glass-Steagall act, and other deregulatory measures, the govt has just stuck its head in the sand on the front end of these disasters which leads to where we are. At the fore of these moves has been Phil Gramm, former McCain financial adviser of 'the recession is mental; the US is a nation of whiners' fame.

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Ricky Spanish on Sep 08, 2008

sounds like state control of business . . . i.e. communism - to me. Isn't it funny, that as the economy keeps losing jobs, the government adds 60,000 new jobs PER MONTH.

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