Fannie Mae

So who is right about Fannie Mae and Freddie Mac? Is it Investors who worry about debt of these companies, or its Regulators and companies who deny anything wrong with companies’ fundamentals? I think two recent WSJ articles provide good insight about the situation. The article “The price of Fannie Mae” puts some real number in perspective and shows political motivation behind Congress supporting these organizations.

“Fannie and Freddie are among the largest financial companies in the world. Their liabilities – mortgage-backed securities (MBSs) and other debt – add up to some $5 trillion. To put that in perspective, consider that total U.S. federal debt is about $9.5 trillion, compared to a total U.S. GDP of $14 trillion. About $5.3 trillion of that debt is held by the public (in the form of Treasury bonds and the like), while $4.2 trillion is intragovernment debt such as Social Security IOUs. This is the liability side of America's federal balance sheet, and its condition influences how much the government can borrow and at what rates.”

The number $5 trillion is too huge to put as liability on the federal balance sheet. It would certainly raise nation’s borrowing cost and jeopardise the Treasury’s AAA. Another article “Fannie Mae Ugly” talks about good and ugly part of this mess. By opening Fed’s discount window to these companies, the Congress would not only end up spreading poison to Fed’s balance sheet but also jeopardise the Fed’s independence. These companies are too big to fail and explicit taxpayer guarantee will put massive liability on the balance sheet (though implicit liability is already present). Will see how Congress/Treasury/Fed deal with this complicated situation/mess.