The Other Bailout

In the US, we usually have some discussion before lending billions to a money-losing bank.

Unless it’s Freddie or Fannie.

Amid all the hoopla over Greece and the European debt crisis, Freddie Mac announced that they lost money in the first quarter and they’ll need another $10 billion in senior preferred stock from the government. Fannie Mae noted that they’ll need another $8 billion. As Everett Dirksen reputedly said, a billion here, a billion there, pretty soon it adds up to real money.

Last Christmas Eve the government announced that the two mortgage giants had been granted an unlimited line of credit with the Treasury through 2012. And the losses keep rolling in. So far, Treasury has advanced $145 billion to the two companies. Talk about real money! For perspective, it’s almost half of the entire Greek economy.

It’s true that because of prior commitments, we need these two public-private monstrosities to keep our mortgage market liquid. But we should be much more concerned about this continued cash hemorrhage than we are with prop trading and Goldman’s bonuses. Hey, would we be happier if Goldman lost money? Then they might not pay out so much.

Mortgage finance is critical to real-estate, so a solution to this mess isn’t easy. But we ought to be putting all our energy into this, since it’s costing us $10 million a day.

Douglas R. Tengdin, CFA
Chief Investment Officer
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