Stockhouse columnists weigh in on Fannie Mae and Freddie Mac this week.
DEFCON 1 refers to the maximum readiness of the United States Armed Forces and is reserved for an imminent or ongoing attack on the U.S. or its armed forces by a foreign attacker. It is not known to have ever been used, not even during or following the September 11th attacks, when DEFCON 3 was reached.
Stockhouse contributor Mike Swanson says that Fannie Mae and Freddie Mac have brought the credit crisis to DEFCON 1. Weighty words indeed.
Swanson notes that, according to Reuters, “Sunday’s announcements are likely to raise anew criticism that the government should have moved sooner to rein in the two companies, especially since investors widely assumed they would be bailed out if they got in trouble. The government denied it, but what was seen by investors as an implicit guarantee of support allowed Fannie and Freddie to borrow at rates only slightly higher than the Treasury – and lower than what their banking competitors had to pay.”
Swanson says, “There is no news that would be worse than the collapse of these two institutions and such an event, if it happens, will have ramifications for the economy and stock market for years to come.”
A bailout “would send a message to the entire world that the Federal Reserve and the U.S. government will print any amount of money or do anything to protect the interest of bankers, the dollar be damned.” Swanson continues, “Such a bailout would put the government directly in the mortgage business. It’s akin to communism. Or communism for the rich and well connected.”
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In A sad day for U.S. taxpayers and investors, Chris Ciovacco looks at the long-term implications of a Freddie Mac/Fannie Mae bailout. He quotes from the July 12 Wall Street Journal:
Treasury Secretary Hank Paulson swatted back reports of government nationalization of Fannie and Freddie, which would mean making explicit what has long been an implicit taxpayer guarantee of their liabilities. This would instantly add $5 trillion in liabilities to the federal balance sheet, doubling the U.S. public debt burden and putting America’s AAA credit rating at risk. This is a nightmare scenario for taxpayers.
He goes on to say: “Think about the long-term implications of the statement above, which references a doubling of the already off-the-charts U.S. debt burden and a mention of America possibly losing its AAA credit rating. While yesterday’s government intervention into the Fannie Mae (NYSE: FNM, Stock Forum) and Freddie Mac (NYSE: FRE, Stock Forum) (GSEs) situation may be good for traders and short-term market conditions, it is most definitely bad news for the long-term outlook for the United States and U.S. investors.”
What does this mean for the long-term? Click here to read more.
