Fannie and Freddie; Not Just Distant Relatives

All of the market hype and shock that ran its course last week first suggested these two behemoths may be headed for extinction. Not so fast. The Treasury Secretary ran to the rescue opening the Fed window and relieving the steam from the pressure cooker. Fannie Mae and Freddie Mac are so-called “government sponsored entities” (GSE). The trouble is that the concept was to build faith and trust behind these operating companies so that capital markets would accept the transactions they were chartered to originate. Of course, the overarching charter was to establish a vehicle for “affordable housing”. Instead, it seems that the years of unbridled operation have created a true monolith of financial prosperity. The catch is that both entities are highly, highly leveraged. For them, it truly takes money to make money. More begets more in a seemingly never ending frenzy of growth. As soon as the cash spigot turns even slightly “off”, the model grinds to a slow stop.

In the case of this past month, stock prices became the immediate barometer of the viability of these GSEs. Their underlying market capitalization dropped roughly 75 to 80 percent compared to the prices last year (when the mortgage meltdown began).

Fortunately, for all of us hardworking tax payers, the market is correcting a bit and the stock prices have already doubled since last week. Clearly there is a long way to go. Many regulators and members of Congress are saying the road ahead will be long and rocky.

For now, the bullet seems to have been dodged. Whew!

Cash may be King for a while….hmmmmmm

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