Foreclosures, Fannie, Freddie and Funny Funds

The story of American economy today is about Foreclosures, Fannie Mae Freddie Mac and Funny Funds. The raging foreclosure crisis is not confined to USA alone but is reacting globally.

The foreclosure crisis emanated from bad sub-prime loans. Fannie and Freddie are the two giant mortgage bodies that are private and yet supported by the government. They are holding nearly half of all the mortgages of the nation. David Andrukonis, the former chief risk officer of Freddie Mac had said few years ago that these bad loans “would likely pose an enormous financial and reputational risk to the company and the country.” Nobody heeded his prophetic words. He shrugged and quit.

To put it bluntly, against the backdrop of the foreclosure crisis, Freddie and Fannie have turned out to be two comic characters. One witty person has dubbed them to Laurel and Hardy of the mortgage world! It is an injustice on the two great comedians to be compared with the ridiculous role of Freddie and Fannie in the foreclosure fiasco.

Today they are literally trying to borrow their way out of their debts. The duo has swallowed outstanding debts of about $1.6 trillion and yet the government is willing to indulge them with more loans. The irony and the funny part of it is that the most powerful advocates of the ‘free market’ are ending up by nationalizing their most atrocious losses. The financial tragedy is being staged in Washington where Fannie Mae and Freddie Mac are playing the leading role in a foreclosure calamity that amounts to $12 trillion. It has overwhelmed all the leading banks across the globe. If the duo had not be bailed out by the government they would have been biting the dust by now.

Fannie and Freddie have been picked up and placed on the lap of the government but the shareholders of the two F’s will get wiped out. The write offs will begin in the second Act of this comedy of errors. It is not just the large shareholders but also the modest American who held Fannie equity who will be negatively affected.

On the conservative side the taxpayer will have to cough up $300 billion to place these two back on rails. The point is – does the kitty have so much funny money? Or will money have to be printed? But what will happen if China demands protection from losses for being stuck with $350 billion F & F bonds? One has to wait and see for answers.