While the Congress ponders whether to cough up $300 billion to backstop Fannie Mae and Freddie Mac, the Fed has opened the discount window to these two crippled companies.
In a separate announcement, the Federal Reserve said it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”
If you take just the mortgages they own you come to a total of $1.7 trillion supported by core capital of about $70 billion. That is a leverage ratio of 24 to 1. Throw in the guaranteed stuff and you balloon to 68 to 1. You can have a very good book of mortgages with a very low default rate and still be out of business quickly with that leverage. This is crazy.
So let me get this clear. You and I (the taxpayers) are going to loan these two companies $300 billion and the existing shareholders and bondholders are not going to have to take a haircut? If Henry Paulson was still running Goldman Sachs and a private company came to him for a rescue to stay out of bankruptcy, you can bet your bottom dollar that he would have “crammed down” the existing shareholders and bondholders. Fannie and Freddie have been run on the edge of criminal negligence by their executives who took millions out during the boom. In any sense of fairness, the equity holders should have been wided out and the bond holders asked to take a serious haircut.
But it looks like Uncle Sucker will step in with no such conditions. WTF. It sounds like Phil Gramm is already running the Treasury and corporate socialism is in the saddle.