Too Big to Fail, I keep hearing that phrase so often when referencing the possible collapse of Freddie Mac and Fannie Mae, despite their stock losing 87% and 79% of their value since last year.
Anyhow, some of the reports from various news outlets nearly gave me a heart-attack, I continued searching and reading for related articles, such as the excerpt from a Wall Street Journal article (1.) which states " The liabilities of Fan and Fred are currently not on this U.S. balance sheet. But one danger is a run on the debt of either company, putting pressure on the Treasury and the Federal Reserve to publicly guarantee that debt to prevent a systemic Financial Collapse". The commentator of the financial times states that the firms are "too big to fail", but if they did, according to a Wall street Journal article (1.) the amount that may be burdened upon the civilian tax base is "5 trillion", not Billion but Trillion with a Capital "T".
Strangely, William Poole a former St. Louis Federal Reserve President has publicly lashed out on the speculation of a bail out, he states in a Bloomberg article(2 ) " Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege , financed by the taxpayer"( in reference to Freddie Mac and Fannie Mae).
Will there be a bail out? Or are both Fannie Mae and Freddie Mac too big to fail?
Well Both Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson seem to believe something great is within the mist, so much to the extent, that they are asking for congress for new regulatory powers, obviously they know something is coming up that will require drastic action. So what may be that action, after reading an article from the Mercury News (3) one can easily speculate. The articles quotes Treasury Secretary Paulson as saying " It is clear that some institutions , if they fail , can have systemic impact, However financial players need to be disciplined in managing risk and not expect the government to fly to the rescue" . Paulson also stated " For market discipline to effectively constrain risk, financial institutions must be allowed to fail"
It would seen that Paulson and Bernanke may simply allow these huge firms go under, but in another statement within the same article (3.) they stated " new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy".
Rather confusing, whether they bail them out, or allow them to go under, Paulson and Bernanke have already polished the floors, in the event that either scenario should fall on the floor, both Paulson and Bernanke would claim plausible deniability. Essentially they are cleaning up after themselves beforehand.
Whatever may happen, the size of these firms will have a dramatic impact on the broader economy, regardless in which way it may sway and fall.
Enjoy !!!!!!!
1. "Price of Fannie Mae" July 10, 2008 (Pg.A14) The Wall Street Journal (Online)
WSJ.com
http://online.wsj.com/article/SB121565255349741343.html?mod=rss_opinion_main
2. Kopecki , Dawn "Fannie, Freddie Insolvent after losses , Poole says Update 1" July 10, 2008 Bloomberg.com
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7NPAG.LEjHQ
3.Aversa, Jeannine " Bernanke : Empower Financial Regulators " July 10, 2008
Mercury News.com (Associated Press -- Source)
http://www.mercurynews.com/breakingnews/ci_9838817
Just as I was finishing my commentary on the video with related articles, I came upon another article from the New York Times (4) titled "U.S. weighs takeover of Two mortgage giants". Anyhow, the article mentions how Freddie Mac and Fannie Mae may "default on their loans "(No surprise there) and that the government may purchase the two firms under a "conservatorship". Anyhow I have too much of a migraine to explain it, you are going to have to do a bit a reading for yourself --- Enjoy!!!!
4.Labaton, Stephen and Weisman, Steven "U.S. weighs takeover of Two mortgage giants" July 11, 2008 New York Times NYTIMES.com
http://www.nytimes.com/2008/07/11/business/11fannie.html?sq=U.S.%20Weighs%20Takeover%20of%20Two%20Mortgage%20Giant&st=nyt&adxnnl=1&scp=1&adxnnlx=1215766899-2C63J5sHW1HuHpsV0CUpSg
Video: John Authers "Short View" July 10, 2008 FT.com
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