Fannie and Freddie Bailout

The talk of a bailout has finally been realized (as if there was ever a doubt).  On Monday, the Federal Government will explicitly guarantee the debt of Freddie Mac and Fannie Mae by lending it money and by buying billions of dollars in mortgage debt held by the two giants.  Treasury Secretary Hank Paulson asked for Congress’ permission to take the unprecedented step to ensure the viability of the GSEs which have bought or financed roughly half of the country’s $12 trillion in mortgage debt.

Like you couldn’t see this coming.  In fact the $300 billion homeowner rescue plan will pale in comparison to what the government will have to do to shore up the ailing mortgage giants.  Now, no matter who you are, if you’re paying taxes you’re footing the bill for the greed and excess that was the housing bubble.  You’re welcome.

Paul Kedrosky said it best (with strong language):

Just because it’s really bugging me, I’ll just say this once to get it off my chest: What a fucking travesty that in the world’s most supposedly free capital market this toxic government-sponsored duopoly exists. I wish I felt like I would live enough to read history books where people laughed at the absurdity.

From Bloomberg:

Treasury Secretary Henry Paulson swung the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.

Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.

The announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the companies that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.

Paulson’s proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The two shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing.

And some more from the New York Times:

As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said. And it will ask Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold. Giving the Fed a consulting role in the companies? oversight is seen as yet another way to reassure nervous markets.

Treasury officials declined to comment on the plan but indicated that a statement would be issued later on Sunday. It was described by lawmakers and officials at other agencies that have been briefed on it.

They said that the Bush administration was hoping that Congress would adopt it quickly as part of a measure intended to help the housing markets and overhaul the regulation of Fannie and Freddie. Last Friday, the Senate approved the measure, and the House is hoping to take it up this week.

Announcement of the plan on Sunday evening was intended to send a sharp signal to both stock markets and debt markets that the government was standing behind the beleaguered companies.

You can read the text of the full statement from Hank Paulson here.