P.S: You’re Broke

Well that didn’t take long.

Source: Heritage.org

On Tuesday a Federal judge dismissed a lawsuit brought against the government and some officials for sending Fannie Mae’s and Freddie Mac’s profits back to the Treasury Department. The shareholders’ argument was that the mortgage giants had paid back the money the government gave them during the crisis. So now it was time for them to start getting dividends again.

But that’s not the way it works.

When you’re so big and interconnected that your failure will take down the economy, and there’s no one big enough to rescue you except the US Government, and the financial system is getting bolloxed up, and the Government (that chartered you) now injects hundreds of billions of capital into your balance sheet, it’s game over. You’re capital is wiped out. The Government’s money wasn’t a loan, it’s equity. Because your equity is gone.

In 2008 Fannie’s balance sheet went from positive $44 billion to negative $15 billion. If the Government hadn’t stepped in no one would have lent them money because they were insolvent. That the Government used special warrants and senior preferred stock to avoid putting Fannie and Freddie onto the Federal balance sheet is beside the point. Treasury injected nearly $188 billion during the crisis. They get to set the rules.

It’s easy to look back six years with our now-functional financial markets and say it was simple to get through the crisis. But it wasn’t simple. Fannie and Freddie stock still trade because of the way Treasury stepped in. But just because a stock has a value doesn’t mean it’s worth anything.


Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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