Fannie Mae and Freddie Mac In Conservatorship

‘While it is not yet possible to calculate the cost of the government’s intervention, it could rise into tens of billions of dollars and will probably be among the most expensive rescues ever financed by taxpayers.’

Yikes! The New York Times reported on Saturday that things are not going well for Freddie Mac and Fannie Mae. On Friday September 5th, both companies were told by their regulator James B. Lockhart that they were being put into conservatorship by the Treasury Department.

So what does this mean for you? Even though Fannie Mae and Freddie Mac jointly own $5.3 trillion in American mortgage debt, the bigger problem for current mortgage holders is still falling house prices and foreclosures.

Both Fannie Mae and Freddie Mac are publicly owned, so although this move was good for the American economy as a whole, it was disastrous for shareholders. Most of them lost nearly everything they had invested while remaining funds were diverted to foreign central banks that owned large amounts of stock.

It doesn’t seem fair for the little guy to lose but in this case, because so much stock was owned by central banks worldwide, making sure those institutions stayed stable is necessary to make sure there wasn’t a massive world market crash.

There is some allegations from critics of Fannie Mae and Freddie Mac’s management that there was some incorrect reporting of capital assets. Basically what this means is that the companies are accused of not writing down the bad loans they had on the books to make it look like they had more cash on hand than they really did.

So far, no accounting fraud has been found but Josh Rosner, an analyst at Graham Fisher, told the Times, “We have just had to nationalize the two largest financial institutions in the world because of policy makers’ inaction. Since 2003, when these companies’ accounting came under question, policy makers have done nothing. Even though they had every reason to know that the housing market’s problems would not be contained to subprime and would bring down the houses of Fannie and Freddie.”

Ever wonder why Freddie Mac and Fannie Mae have such strange names? Tune in tomorrow to find out!