Bailout Impacts Taxpayers And Shareholders

| September 8, 2008 | 0 Comments

It’s all over the news.  BAILOUT!  Mortgage giant’s Fannie Mae (FNM) and Freddie Mac (FRE) have been taken over by the Federal Government.  I actually think the proper phrase is “placed in a government conservatorship”.  Whatever the words are – the result’s the same.

The US Federal Government is now the nation’s largest mortgage lender.

The deal’s actually quite simple.  The government invests $1 billion of new capital into each of the companies.  The government also agrees to back the companies for an additional $100 billion dollars each.  In exchange, the government gets approximately 80% of the company equity.

If those sound like big numbers consider this . . . Fannie and Freddie own or back almost $5 trillion in home loans.

Now, nothing I’ve said so far is unique.  I’ll be the first to admit you could have found this information in the newspaper, on the internet, or even heard about it from the radio or TV.

But there’s something the Government’s hiding.

They’d never admit it, but the government didn’t do this to improve the economy.  They didn’t do it to help homebuyers.  Nope.  They’ll say otherwise.  They’ll tell you they did it to improve liquidity.  To help homebuyers get mortgages.  But that’s a lie.

The only reason the government took over Fannie and Freddie was simple.  They were on the verge of collapse.  The losses they needed to absorb were exceeding their capital.  And the losses were getting worse – not better.

If either of these firms missed a bond payment, or heaven forbid, went into bankruptcy the results would be cataclysmic.  If that occurred, it would absolutely destroy the US economy.

But that’s not all.

The government’s hiding something else.

They’re hiding the true cost of this bailout.  You and I my friend are going to pay for this mortgage debacle . . . and not once but twice!

What do I mean by paying for it twice?  Simple, you are going to get your mutual fund or retirement account statement sometime in the next month.  Fannie and Freddie were so big that most diversified mutual funds and retirement programs held shares.  That means you lost money because of this bail out.  Don’t believe me?  Just check your account statements at the end of the month.

The second way we’re going to pay for this is as taxpayers.

The government’s using taxpayer backed money to handle this takeover. Where do you think they’re going to get $200 billion dollars?  From you and me of course.

That means it’s your tax dollars that are going to bail out these government sponsored entities.  We’re going to pay for these problems twice and there’s no way around it.

Here’s the final point I’m going to make.

It’s a little secret that everyone knows, but nobody wants to admit.  The government doesn’t want to back Fannie or Freddie at all.  Think about it.  It’s like handing a credit card to your teenager and then dropping him or her off at the mall.  There’s only one way that story ends – and it’s not good.

When the government sells their ownership in Fannie and Freddie in a few years, they’re going to try and end the government backing.  The government’s learning a very important lesson about co-signing for other people’s debts.

The markets are up right now.  And they’re up big.

Markets around the world jumped higher on news of the government takeover.  Our own Dow Jones Industrial Average is up more than 250 points.  But it doesn’t make any sense.

What changed over the weekend?

None of our economic problems have gone away.  Home foreclosures are at record highs and climbing.  Home prices are sinking like the Titanic. The credit markets are as tight as a rusty old bolt.  Loan standards are so strict the Pope himself couldn’t get a home loan.  And every weekend we have another bank taken over by the FDIC.

Oh, and before I forget, more people are losing their jobs than at any time in the last 5 years.

So seriously, what’s changed?  Nothing.  This takeover might be a start, but it’ll be a while before we see any real improvement in the economy.

If you’re unfortunate enough to own shares in either Fannie Mae or Freddie Mac, I have only one suggestion.  Hold tight, but don’t expect a recovery any time soon.  It’s not worth selling the stock at this point – the damage is done.  Think of your shares as a really expensive lottery tickets . . . . Someday, your grandchildren might break even on that investment.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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