In a Wall Street Journal article today Barney Frank "warns" of a non government backed future for Freddie, and Fannie. "Rep. Barney Frank has unexpectedly called into question the safety of investing in Fannie Mae and Freddie Mac."
Basically, Representative Frank is saying that bondholders of Fannie & Freddie can't expect the government to step in and make good on these bonds. This is something that I have been complaining about since that day in September 2008 that I look at as the official end of Capitalism. When the government actually bailed out the mortgage giants, investors got exactly what they had been betting on all along. After all, as quasi government agencies their investment risk was considered nearly on par with T-bills, but the investors were reaping far greater rewards throughout the housing bubble.
The article states "Frank said that when the firms are restructured, debt holders could take a haircut and shouldn't assume that any losses would be covered by the government." Now, if Barney is being genuine (which I find highly suspect) then his statement regarding potential government actions "from paying nothing to a haircut to whatever," would actually be the right thing to do. If you don't believe me take a look at what the front page of a FNMA Prospectus looks like -
Specifically, notice the "NOT GUARANTEED BY THE UNITED STATES, AND DO NOT CONSTITUTE A DEBT OR OBLIGATION OF THE UNITED STATES..."
So if Mr Frank is being "frank" what does this mean for the Federal Reserve, and their $1.25 TRILLION in MBS purchases? Do you think Ben might just be calling Barney to explain where the money has come from to purchase these toxic assets?
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