Computer & Internet

Plans have been leaked over a proposed government bailout of Fannie Mae and Freddie Mac. While there have been rumors of this for the last few months, apparently it is quasi official, although the official announcement is going to come out tomorrow. So what are the details of the bailout?

First all the top executives and the board are going to be dismissed. I have mixed feelings on this. On the one had I am sick of CEO’s walking away with millions after running their companies into the ground. But on the other hand I don’t know if dismissing all the top executives and the board at the same time is a wise move. Once the Fed moves in, if they have questions it will be a little harder to get answers with basically the entire executive level of the corporation out of the picture. I would have preferred to see a few people stay around at base pay.

The stock has plummeting in the last month over fears that there would be a government takeover and it might possibly wipe out shareholders. The inside sources are saying that the shares will be diluted but not entirely wiped out. So basically the fears of investors were more or less well founded. The implications of this are probably why the plans were leaked today after the close of the stock market. [Full Disclosure : My investment firm has been selling Fannie and Freddie Mae short over the last month. I thought it was risky to short a company after it had already lost 90% of its value but I guess they were right.]

Now to the bigger question what does all this mean? First of all it means that as of today we are in the midst of a huge financial crisis. Taking over companies the size of Freddie Mac and Fannie Mae is a big deal. It’s going to cost tens of billions of dollars o taxpayers and is the largest government takeover in US history. Freddie Mac and Fannie Mae provide insurance for half of loans issued in the US. Currently they own or provide insurance for 5 trillion in loans. Now the federal government provides insurance for 5 trillion in loans. This means if someone decides to not pay their mortgage instead of a bank coming after them the federal government could be knocking on their door.

What does it mean for the future? Oddly enough I have been waiting for this to happen and I think it could have a positive effect on the real estate market. Why? During the financing crisis Freddie Mac and Fannie Mae have added tons of loan restrictions which have hurt the real estate market. While some of these rules have simply gotten rid of the free wheeling money lending of the boom, others seem bizarrely restrictive. For instance there is a rule that individuals can only get 4 property loans regardless of income or credit score. So if someone has a few million dollars in the bank they could for instance only get 4 150k rental houses unless they wanted to pay cash. As you can guess these restrictions have hurt the real estate market. It’s assumed that with the US Government (which has been attempting to help the real estate market pull out of this mess) taking over Freddie Mac and Fannie Mae that they will remove some of the recent loan restrictions.

Are we likely to see more government bailouts? I don’t think so. The Fed has made it clear that they are not going to let Freddie Mac and Fannie Mae fail but have basically said the same is not true of the smaller banks. So I think for small banks that run into problems they are going to fall instead of be taken over.

Source: escapeso