Thursday, July 10, 2008

Fannie and Freddie May Go Under

NYT is reporting:

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

We have given less coverage to the mortgage crisis of late because it is pretty obvious how the Federal Reserve will react to further crisis situations. They will buy any junk. If Freddie and Fannie have junk in their portfolios (and they probably have billions), Buy'em up Ben Bernanke will buy'em up. Nothing new here. It is now obvious this is Bernanke's modus operandi.

To date, Buy'em up Ben has been sterilizing his buying operations by selling other parts of the Fed's portfolio simultaneously with his junk mortgage purchases, but soon he will be out of paper to sterilize his buying operations, and at that point Ben will become Ben the money printer. If we get to that point, all our aggressive inflation projections will be taken off the table and replaced with even greater inflation projections.

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