Tuesday, February 10, 2009

GSEs Will Need (Much) More Than $200 Billion

If anyone wants to see a glaring example of the faulty approach the government has applied to "fixing" its failed entities, look no further than the GSEs (Fannie and Freddie). And for pearls of the economic wisdom percolating in D.C. one only has to listen to FHFA director James Lockhart, who discusses why the GSEs will likely need much more than the previous $200 billion number-out-of-a-hat.
When we sized the amount in September, we obviously looked at stress tests and what was happening in the marketplace. There’s been some significant events since then that weren’t in our forecast.
This kind of brilliance rivals the rating agencies... And this is the nationalized agency that makes sure that the mortgage problem is contained. So what are the GSEs doing now to deal with this cash sinkhole:
We would expect them to be writing business that’s profitable at this point, not a large profit. But we would not expect them to be writing business at a loss under any program.
We are just speechless. And for the knockout punch: "The Treasury, not the companies, would bear the cost under proposals to use the companies to drive down mortgage rates to about 4.5%." With intellectual giants like Lockhart out there, we fully expect mortgages to have lower rates than Treasuries very soon.

As we wrote yesterday, the GSEs were the first failed attempt at properly fixing the system and to date the most indicative, and as long as the administration is terrified of taking decisive action, one should fully expect this $200 Billion number to grow to $1 Trillion within a year. Sphere: Related Content
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Broken said...

Last year, the GSEs allowed themselves to be dumping grounds for crap from the banks. Convenient suckers.

Anonymous said...

I think you are mistaken in your belief that the GSE were taken over to be fixed. I clearly remember the plan was to seize the solvent companies and turn them into dumping grounds for overvalued mortgage assets. And that plan has succeeded brilliantly. Hence the need for more money to cover the losses.