Bush “nationalized” Freddie and Fannie

Who would have guessed that Bush was such a fan of euro-socialism? Technically they are saying the two are in “conservatorship” and not “receivership” though as usual, this is mostly parsing to help prevent Bush being associated with the word “nationalize.” What an amazing coincidence of timing we saw last night as Bush stepped in after the GOP convention was finished and the weekend was starting for most Americans. It should come as no surprise that McCain and Palin avoided any talk of the economy, because that might be of interest to Americans (and the world, I might add) as we work through the second half of the trillion dollar plus credit crisis.

For starters, let’s look at the financials involved. The US government (that’s us) is now the proud owners of roughly $1.6 TRILLION in debt. The two own or guarantee about half of all mortgages in the US. Freddie and Fannie will continue to operate though under new leadership and surely under stricter conditions, similar to the rest of the finance market. In the middle of a housing crisis, making it more challenging to get a loan will not help us move through the months of houses sitting on the market. Caution makes sense, but it will take even longer to move through this period.

Shareholders will either lose everything or almost everything is what they’re saying now. If you have been following the movement of Freddie and Fannie in recent weeks since the mid July intervention you’ve surely noticed wild swings, so plenty of people have been making money trading these stocks. The stocks are still down 80% for the year but there is no reason why the shareholders should receive anything. They gambled and lost, end of story. The shareholders probably didn’t complain much when the stocks went through the roof during the bubble so just as I saw no reason to give Bear Stearns shareholders anything, I see no reason why they deserve it now.

What I also find interesting – interesting as in, when will these people ever learn to tell the truth – is that the big names on Wall Street all played their roll in propping up Freddie and Fannie. Many of these companies have repeatedly spun tall tales about supposedly great companies and honestly, how can anyone ever believe a word they say? One day we may even see someone hold them accountable for their cheerleading but we’re far from that day. I supposed Merrill Lynch and others have more important worries now that they’re about to write-down even more business which ought to put them in an even more delicate situation. Let’s hope we don’t bail those bums out as we did with Bear.

How long this “conservatorship” period lasts is anyone’s guess. Will it even work or will it have to be completely nationalized is another big question and questions during troubled times do not bring confidence. The market is built on confidence so are they helping? Long term, Americans are stuck with the debt until Freddie and Fannie can generate enough revenue to move on. Freddie and Fannie will have to be more cautious with loans until their debt is settled and that is indeed a problem. Moving forward, how interested will the rest of the world be in buying America’s credit debt after they lose everything? As a country we have pushed our credit problem to everyone and after this loss, the world is going to be much less interested in buying our problems, rightly so.

Since the credit crisis first started many have been wondering if this is the end of the American addiction to credit. While the UK has an even worse ratio of debt to GDP, the US is not far behind. Beyond Freddie and Fannie we need to think about real solutions to our credit problems. Americans have been on a thirty-plus year decline in real purchasing power and sooner or later, that has to be addressed. It is not sustainable to live on credit as individuals or as a country. Credit has helped dodge this complicated issue for decades but the bill has arrived. There are only so many bailouts that the US government can provide. I only wish this was the last but more will come soon enough. Where the money will come from is anyone’s guess.

An American in Paris, France. BA in History & Political Science from Ohio State. Provided consulting services to US software startups, launching new business overseas that have both IPO’d and sold to well-known global software companies. Currently launching a new cloud-based startup. Full bio here.

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