Fannie Mae and Freddie Mac: Rock Bottom?
Back in May, a number of people expressed deep concerns over Fannie Mae and Freddie Mac. Their financial cushions were too thin. If they should fail, then
the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely.
Because of the widespread perception that the government would intervene if either company failed, they can borrow money at lower interest rates than their competitors. As a result, they have earned enormous profits that have enriched shareholders and managers alike: from 1990 to 2000, each company’s stock grew more than 500 percent and top executives were paid tens of millions of dollars.
…In a March meeting, Freddie Mac’s chairman, Richard F. Syron, bolstered those fears by saying the company would put shareholders’ interests first.
Amid rumours that both companies–owned by investors but created by Congress–are now close to collapse and with their stocks plummeting, have we reached rock bottom in the mortgage debacle? And at what cost to the taxpayer, now deep in debt, saddled with sky-rocketing oil prices, and facing a world where food prices may be threatening global stability?
Update: Fannie Mae and Freddie Mac shares were down nearly 50 percent
in early trading as investors worried that the companies will
suffer larger losses and default on debt. July 11.
Update 2: CR has some thoughts on the subject.