FNM and FRE will cost you a bundle

What Will Mac ’n’ Mae Cost You and Me? (August 23 - NYT)


The inevitability of a taxpayer-funded bailout of Freddie Mac and Fannie Mae, the hobbled mortgage behemoths, shook investors last week, and shares in both companies plummeted on fears that existing stockholders would be wiped out.

Nobody knows how the Fannie and Freddie situation will play out. But the implications of a default on the companies’ subordinated debt shows how complex and confounding — not to mention costly — this business of bailouts has become.

The main reason that FNM and FRE are “too big to fail” is that they are both far too deep in the derivatives game for anybody to have a reasonable assurance of what would happen if they did fail. And nobody wants to find out, because the fear is that such a scenario could literally wipe out the entire banking system.

Remember, it was Fannie that announced in 2005 that it couldn’t quite finish reporting its 2004 results because its derivative portfolio was too tangled to easily measure. So they set out, and after they unleashed a crack team of 1,500 forensic accountants and racked up $800 million in expenses, they proudly announced their final results for 2004 in….2006.

To recap: A single company, using a substantial proportion of the best accounting talent in the world, after spending a year and a half and $800,000,000.00, during stable market conditions, was finally able to provide an accurate assessment of its fiscal condition two years prior.

What would happen if multiple large companies got into trouble during a time of market turbulence? That’s what nobody wants to find out.

This is a companion discussion topic for the original entry at https://peakprosperity.com/fnm-and-fre-will-cost-you-a-bundle-2/