Wednesday, March 19, 2008

You want more?

You get it. Fannie Mae and Freddie Mac have $200B more to fool around with, since new rules announced today allow them to keep less capital on hand, and thus more to lend out.

The announcement marked a stunning and, some say, risky change of course for the administration and the regulator that supervises the companies.

As recently as last fall, senior administration officials had been urging Congress to adopt tighter regulations on the companies that would limit their flexibility to hold mortgages. The concern by some officials, including the current and former chairmen of the Federal Reserve, has been the implicit guarantee of government backing in case either company defaults on its debts, which are huge.

The Bush administration has repeatedly said there is no such guarantee, but investors continue to believe — as evidenced by their willingness to lend to Fannie and Freddie at lower rates of interest — that the companies are “too big to fail” and that the government would mount a taxpayer bailout in case of a default.

But at least in the short term, Wednesday’s decision reduces the cushion of money that supports the companies’ borrowings — and also stands between the companies and a possible taxpayer bailout should they encounter any major problems.

“I think it’s very dangerous and it’s a sign that people are very frightened,” said Thomas H. Stanton, an expert on the two companies. “At a time in which finance companies are holding questionable assets and facing losses, regulators typically require more capital, not less.

With its shaky record as a prognosticator, the state of the Union is strengthened when Blog Simple forecasts gloom and doom, so here's the prediction. One or both of Fannie and Freddie will go belly up this year and will be bailed out by the government. This move today made that much more likely. In the article:
“If the markets continue to decline, Fannie and Freddie will be two of the bodies on the beach,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “The argument is settled that the less capital the companies hold, the more risk they take.”


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