I guess even the Bush administration doesn’t want Fannie Mae and Freddy Mac, the two giants of the mortgage industry in the US to fail, at least not on Mr. Legacy President’s watch. Naturally, just as with the Bear Stearns bailout, they announced the rescue plan on a Sunday:
Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.
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.”
An official said that the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion. […]
The officials said they were prompted to act because, despite repeated assurances by top officials that the companies had adequate cash to weather the current financial storm, Fannie and Freddie suffered a withering blow of confidence last week when their stocks plummeted on the New York Stock Exchange. As a result, Freddie faced an uncertain debt offering on Monday.
The companies, known as government-sponsored enterprises, or G.S.E.’s, touch nearly half of the nation’s mortgages by either owning or guaranteeing them, and the debt securities they issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds, big companies and other large institutional investors.
Three Hundred Billion Dollars for just two companies. Even in the age of Bush the Lesser, that isn’t chump change. To give you some idea of the magnitude of the situation, the entire savings and loan bailout in the late 80’s and 90’s in which over 700 failed savings and loan institutions were “resolved” by the federal government cost less than 200 billion dollars. Even with adjustments for inflation and the devaluation of the dollar, it’s staggering to think that the estimate (and I doubt anyone can reliably predict the actual cost) to save Freddie and Fannie from insolvency is comparable to the entire cost of the savings and loan crisis. That cost was spread out over a decade. The rescue of Fannie Mae and Freddie Mac is likely to be incurred over a much shorter time, and during a period of great financial instability.
Of course, they aren’t the only financial institutions likely to fail over the next few months. We could be looking at a collapse of banks and other financial companies the likes of which we have not seen since the 30’s during the Great Depression. Should war with Iran or other calamity occur causing crude oil prices to skyrocket, this catastrophe would spread to engulf the entire world’s economy.
Like dominoes, the first few that fall are harbingers of all the rest to come. And we live in a world of economic interconnectedness far in excess of that which existed in the early 20th Century. Other countries are heavily invested in our debt, hold vast amounts of our dollars in reserves and depend on our markets to fuel their economic growth. Trust me, there will be more falling dominoes in the Grand Unified Globalized Economy. You can count on it. The only question is how many will fall.
