I seriously question why it is that the tax payer has to bail out the shareholders of Fannie Mae and Freddie Mac? Why is it in the publics interest to baill out shareholders when they in turn receive no compensation for theiir actions? Why do we all not put our life savings away in morgage equity well knowiing that the government will come around and lend a hand when things get tough.
two points: 1. I think you should have posted this one in the General discussion forum rather, and 2. you ask “why it is that the tax payer has to bail out the shareholders of Fannie Mae and Freddie Mac?”. My two cents worth - because if they don’t it is quite likely the US will experience the worst financial crash in the history of mankind. Think about what happens when $5 trillion of securities go belly up. Also, don’t think that the shareholders will necessarily get bailed out - expect them to lose just about every cent of their holdings in Fannie and Freddie. The Federal govt isn’t going to be bailing out the shareholders, this a bailout for the entire economy.
Yes, my appologies i should have posted under the “general section”…please could you explain how this would effect the economy as a whole. I’m still trying to connect the whole proccess as to how this event would ripple through the economy. From what i understand is that the two firms do not lend directly to homebuyers, instead buy mortgages from approved lenders and then sell them on to investors. Surely the burden lies primarily with the shareholders?
- “The worst financial crash in the history of mankind”? The Fall of Rome led to 800 years of no economic growth in Europe. The Black Plague of 1340’s caused the world population to drop so much that it didn’t reach a new high until the 1800’s. Keeping the taxpayer out of F&F’s problems is probably not of that magnitude. 2) “Why do we all not put our life savings away in morgage equity well knowiing that the government will come around and lend a hand when things get tough.” There are mortgage backed securities with that kind of guarantee (GNMA’s) and F&F’s debt is supposed to be close. 3) “Think about what happens when $5 trillion of securities go belly up” Except this is just fear-mongering and not what is on the table at all. Most of those securities are performing as expected with reliable cash flows that have nothing to do with government intervention. In any event, the govt is offering some small number of billions as loans which would hardly do much if we were talking about $5T going up in smoke.
True Joey, the Fall of Rome etc etc was pretty bad, but I would hazard a guess that in sheer $ terms what we are going through or would experience with the insolvency of Fannie and Freddie is probably worse. I have no idea what would happen if F&F were declared insolvent - would they start selling off the mortgages they hold? Who would buy them? Who could afford to buy them? If a financial institution becomes insolvent do they start foreclosing on the mortgages they hold? How else would creditors get to see any of the money they had lent the institution?
The hadn’t invented $ in 450 AD. You can’t foreclose on a mortgage when the mortgage borrower is complying with the terms. Even if he isn’t foreclosure is tough. Anyway, you need to stop worrying about an F&F insolvency. If the gov’t just said “bite me” and F&F couldn’t pay, there would be a workout with their creditors. Many of these creditors bought the bonds hoping that F&F would be insolvent, the govt would take them over, and they would have full faith and credit bonds on the cheap. My heart would bleed for them. Lots of people would gripe and there would be some serious financial damage as a huge pile of AAA bonds got downgraded to D so we would have the mother of all fallen angel stories. Anybody holding subordinated bonds would be SOL. In the end, the world wouldn’t fall apart. Underlying this is a bunch of mortgages that aren’t terrible and a crappy company that gets $10B in govt subsidies per year. The crappy company goes away and the people who took on risk get bitten. Too bad.