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Do not give in to Evil, but proceed ever more boldly against it

Sunday, July 13, 2008

Living in an Imperial World: Rome's Finances Get More Shaky

UPDATE 2325 EDT 13 July 08: Here's the deal.

Cliff's Notes version: One bankrupt entity (the US government) bails out two lesser insolvent organizations (Fannie Mae and Freddie Mac).

No scam here, folks. Please move along now, and make sure you buy some more Treasury bills on the way out - especially you people who we regulate, as well as you foreign fellows. Each of those securities is backed by the full faith and credit of the American Government, you know...so take home a wheelbarrow full.

Statement by the perps.

Say 'good night' to the American experiment.

Last one into the bunker - remember to turn off the lights.

UPDATE 1520 EDT 13 July 08: The UK's Financial Times has the latest as the deck chairs aboard the SS United States get re-arranged. Watch the Asian markets as they open later tonight, US time.

I have been looking for a good overview piece on the Fannie Mae/Freddie Mac debacle as it reaches the crisis stage.

This morning, courtesy of Instapundit, I found it.


...Fannie and Freddie should have been fully privatized years ago, so that they were subject to market competition; alternatively, although less ideally, they should have been brought back into the government to be regulated more effectively. Leach was right that leaving them as they were was a disaster waiting to happen. And now it looms larger than ever, with potential disastrous implications, as Tom Petruno explains:

On Friday, rumors swamped financial markets that the federal government would be forced to step in to aid mortgage-finance giants Fannie Mae and Freddie Mac, which together own or guarantee $5 trillion in U.S. home loans.

In Wall Street’s version of a bank run, investors drove shares of Fannie Mae and Freddie Mac to 17-year lows, signaling a gnawing lack of faith in the companies’ ability to survive rising mortgage defaults without government help.

As predicted on this site all those years ago, when push comes to shove, the government will not have the cojones to let Fannie and Freddie fail:

Despite the companies’ assurances that they have adequate capital cushions against surging defaults on the mortgages they own or guarantee, the market doesn’t believe them.

For the federal government, that poses a quandary. Because of their size and importance to the mortgage market, it’s inconceivable that Fannie and Freddie would be allowed to fail.

A government takeover, however, would be a financial disaster that might unthinkable consequences:

But an outright takeover of the companies by the government, as some experts have suggested, could frighten foreign investors—who are big lenders to the Treasury—by, in effect, adding the companies’ $5-trillion debt load to the Treasury’s massive debt of $9.5 trillion.

Nationalizing the companies “would put the full faith and credit of the Treasury at risk,” Sinai said. “It would make foreign investors think hard about buying U.S. Treasury debt.”

Want a worst case scenario? The government takes over Fannie and Freddie. The immense increase in the national debt causes the bond rating agencies to cut their rating of Treasury securities from their traditional AAA. Along with other economic problems (whether its mostly whining or not), this spooks investors, especially foreign investors. Foreigners abandon the dollar for the euro, dumping treasuries. The collapse of foreign investment in Treasuries makes our massive current account deficit unsustainable. At which point, things really go to pot...

Read the whole thing.

Then, first thing Monday, make sure you take at least three months' worth of expenses, in cash, out of your local bank and secure it at home.

IndyMac ain't the first bank to fail, and it won't be the last.

This gent says 100 more banks will go Tango-Uniform this year:

...It was a huge week and there is a lot of news coming out this weekend. By the way, the Feds “seized” IndyMac today. Don’t you just love that word? I guess if you were long the stock, you might not love it. But if you were long IndyMac or any other financial institution, you must be dumb as a soggy bagel. As for IndyMac, Freddie and Fannie, I hate to say I told you so, but “I told you so.” And there is more to come, so stay tuned. Watch for 100+ bank failures by the end of the year....

Tempus fugit.


Blogger George said...

To Fannie Mae and Freddy Mac, along with Countrywide and IndyMac, add JP Morgan-Chase.

Now go read Brick Oven Bill.

I like the Monday advice, but I think you're dreaming when you say take your cash out, unless you mean to convert it to gold or ammo immediately. Along with any banking crash will go hyper-inflation, and that three month's cash won't buy a roll of toilet paper soon.

July 14, 2008 at 11:35 AM  

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