Bailout Impacts Taxpayers And Shareholders
The Dynamic Wealth Report
September 8, 2008
Government Lying About Fannie And Freddie
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.
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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.
• Apparel Retailers Industry (Up 10%)
Believe it or not, this month the Apparel Retailers Industry broke into
the top ten for industry performance. The industry’s been lead higher by
companies like Polo (RL), Limited Brands
(LTD), and Gap (GPS). And
here I thought we were in a softening economy teetering on recession.
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