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Tuesday, December 15, 2009 2:04 PM


Fannie Freddie May Need Another $400 Billion Taxpayer Assistance


Remember the ridiculous claim that taxpayers would not lose a dime on Fannie Mae or Freddie Mac when they were seized 16 months ago?

It's certainly no surprise in this corner but Fannie, Freddie Overseer May Seek More Treasury Aid

Fannie Mae and Freddie Mac’s federal regulator is renegotiating the companies’ financing plan with the U.S. Treasury Department and may seek an increase to their $400 billion federal lifeline before the end of the year, according to people familiar with the talks.

Fannie Mae and Freddie Mac, the largest sources of mortgage money in the U.S., have used $111.6 billion of their $400 billion in backup financing in less than a year.

The financing plan instituted for Fannie Mae and Freddie Mac requires them to reduce their $1.57 trillion combined mortgage portfolios by 10 percent annually starting next year and caps their debt issuance at 120 percent of their assets.

Officials set up a $200 billion lifeline with the Treasury, which was doubled in May, to keep the companies solvent. If they exhaust that backstop, regulators will be required to place them into receivership.

Treasury officials aren’t likely to take the chance of allowing the companies to fall into receivership, which is a bankruptcy-like process that would increase the companies’ debt costs and disrupt the mortgage markets, said Paul Miller, a former examiner for the Federal Reserve who now analyzes the banking and mortgage industry for FBR Capital Markets in Arlington, Virginia.

‘Pain Threshold’

“The Treasury has shown that their pain threshold is almost” non-existent, and the housing “market is still very fragile,” Miller said in an interview.

The companies have said $200 billion apiece may not be enough support. The Treasury Department is facing a Dec. 31 deadline to increase that amount without congressional approval.

“With the GSEs being used as public policy tools, it is impossible to quantify with certainty what losses might be in a stress scenario, as the rules of the game might keep shifting,” said Rajiv Setia, a fixed income analyst for Barclays Capital in New York.
No Pain Threshold

It is quite clear the Treasury does not care how much pain it inflicts on taxpayers, which is exactly what happens when housing is used a public policy tool.

Does anyone believe Fannie Mae and Freddie Mac will reduce their $1.57 trillion combined mortgage portfolios by 10 percent annually starting next year or caps their debt issuance at 120 percent of their assets?

If this absurd plea for help goes through, taxpayers will be on the hook for up to $800 billion in losses.

Yet, the administration has the gall to brag about making a few $billion on Citigroup even though it is bleeding badly on the GSEs, lost $100 billion or so on AIG, and the Fed's balance sheet is an unaudited mess.

When you throw $trillions around, you are bound to pick up a few dimes somewhere. Bragging about it is ridiculous. Can we have a complete accounting please?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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