Quote:
Originally Posted by Solon
I'm surprised that the financial geniuses in these parts have left this story alone so far today. I was waiting to read what they had to say.
http://www.economist.com/finance/dis...ry_id=12078933
This is a pretty huge development, IMO. While it's clear that the feds had to do something to keep Freddie and Fannie afloat, I'm a little sick when I think of how much it might cost taxpayers in the long run.
Meanwhile, their executives have been extremely well paid (e.g. http://www.msnbc.msn.com/id/25740405/)
I don't know how all the ramifications will play out.
PS - maybe I should have put this in current events. Sorry if it's misplaced. |
The government had to step in if they cared at all about market stability. Fannie and Freddie have issued over $5 TRILLION in agency paper. That is a HUGE amount of cash, and the government can't afford for Fannie and Freddie to look like they can't cover the paper. If they did, the dollar would be weakened tremendously, markets would seize up, money supply would tighten, etc. It would have been a disaster. I also think the government structured the "takeover" very well. The deal created a new class of preferred stock that will be issued to the government. In effect, by becoming a preferred stockholder, the government told the markets that the paper will be covered no matter what. In a liquidation, creditors are paid off first, followed by preferred stockholders, followed by common stockholders. By becoming a preferred stockholder, the government preserved the interests of the debtholders first, and we know the government isn't going to allow a default for the debtholders when it means the preferred stockholders (i.e., the government) would get nothing back.
The markets love the move so far. They have to. There was too much at risk if Fannie and Freddie went under.