Tuesday, June 29, 2010

'The Mother of All Bail Outs'

Fannie Mae and Freddie Mac are so-called "government-sponsored enterprises" which purchase loans and repackage them into investable securities backed by the federal government, i.e., the taxpayers. Created in the 1930's by the federal government, these entities effectively subsidize homeowners by making the cost of credit cheaper than otherwise. Bloomberg reports on the potential cost of bailing out yet another government sponsored boondoggle:
The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of
American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said
Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.
And recall, in addition to these unlimited lines of credit, the Fed has already purchased over $1.1 Trillion worth of mortgage backed securities on the open market (and by "purchase" I mean the Fed has created $1.1 Trillion of reserves out of thin air which amounts to an inflationary powder keg). It did this to prop up these securities, thereby reducing interest rates on home mortgages over the past year.

So, there we are, perfect examples of government intervention in the economy at its finest.

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