Feds can't fix Fannie and Freddie
The mortgage giants aren't short of cash. They're stuck with bad loans that aren't going away. Also: Short sellers didn't bring down the lenders -- the lenders did it themselves.
As the Treasury prepares to ride to the rescue of Fannie and Freddie, it's worth noting one little detail: That so-called plan is in reality just a concept.
Fannie Mae and Freddie Mac do not have a liquidity problem that can be solved by the Federal Reserve or even by an injection of Treasury capital. It's a solvency issue. Short-term cash isn't the real problem. Over time, the mortgage giants' liabilities are quite likely to swamp their assets. Thus their assets are contingent, but their debts are forever.
Further, if the Treasury is the only entity left willing to buy shares to shore up Fannie and Freddie, what will happen to other troubled financial institutions? Between now and the year's end, more mortgages will percolate through those institutions' balance sheets, creating losses that will force them to seek capital as well.
As for access to the Fed's discount window, even if Fannie and Freddie use it, that won't change much. Lehman Bros. has had access to the discount window, and that has done Lehman little good. Nor has it healed Washington Mutual, Bank of America, Citigroup, etc.
The rapidly growing disaster the country faces, in addition to the financial one, is a recession that's worsening -- a reality depicted in widespread images of depositors lined up at IndyMac bank. (A friend of mine has also noted lines at multiple locations of Washington Mutual.) I suspect that as this process moves forward, many regional banks will experience modest runs, because fear becomes contagious at some point. And fear eventually leads to panic.
As the Treasury prepares to ride to the rescue of Fannie and Freddie, it's worth noting one little detail: That so-called plan is in reality just a concept.
Fannie Mae and Freddie Mac do not have a liquidity problem that can be solved by the Federal Reserve or even by an injection of Treasury capital. It's a solvency issue. Short-term cash isn't the real problem. Over time, the mortgage giants' liabilities are quite likely to swamp their assets. Thus their assets are contingent, but their debts are forever.
Further, if the Treasury is the only entity left willing to buy shares to shore up Fannie and Freddie, what will happen to other troubled financial institutions? Between now and the year's end, more mortgages will percolate through those institutions' balance sheets, creating losses that will force them to seek capital as well.
As for access to the Fed's discount window, even if Fannie and Freddie use it, that won't change much. Lehman Bros. has had access to the discount window, and that has done Lehman little good. Nor has it healed Washington Mutual, Bank of America, Citigroup, etc.
The rapidly growing disaster the country faces, in addition to the financial one, is a recession that's worsening -- a reality depicted in widespread images of depositors lined up at IndyMac bank. (A friend of mine has also noted lines at multiple locations of Washington Mutual.) I suspect that as this process moves forward, many regional banks will experience modest runs, because fear becomes contagious at some point. And fear eventually leads to panic.