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Link: Burnham’s Beat: Fannie Mae Is Saved! Its Shareholders … Not So Much.

Excellent editorial about the future of Fannie and Freddie. Thankfully their dangerous party may be over.

Discussion

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  1. IMHO, this is bad.

    FM2 serves no real purpose. If the loans were worth anything then they companies that buy the bonds would instead buy the loans and cut out the middleman (FMs shareholders).

    We don’t have these outside USA, if you wanted to invest in mortgages, you’d buy shares in the bank. Reinsurance is done at commercial rates.

    So I reckon the entire purpose of the FMs was to subsidies high risk loans. The banks can lend at a reduced risk because they can sell on the loan, the buyers of the bonds don’t take the risk, the risk is dumped into FM&FM.

    The unwritten but correctly assumed subtext is that the Government will rescue them if they get into trouble.

    In effect it was a subsidy to the US mortgage reinsurance market that didn’t cost the government a penny, as long as the market doesn’t burst.

    Great, the banks can lend more at higher risk and the lender pay less for mortgages. A commercial advantage that lets them create business and commerce and the like more competitively than in the rest of the world.

    Great for the US, because money borrowed from the Federal reserve lets the fed print more US$ and those need to be soaked up into US business or they would drive the dollar down. So this helps that money go into the US to grow it.

    For all the talk about how much money China has made, every one of those $ has first gone through the pockets of an American. China’s currency is not negotiable.

    So we get to the rescue plan, the Fed Reserve contribution is nothing, they will lend only against “Government assets”. This is a pure US gov bailout.

    There’s no money to do it, Treasury Bonds flopped in 2004, so it will be borrowed from the Federal reserve.

    That gives them (the private banks that own the federal reserve) the right to lend out the fractional reserve multiplier. (I think it’s 7.3 times as much in the US).

    So how is all this new money, in addition to all the previous money borrowed from the fed going to be soaked up? It can no longer go into high risk mortgages. Most likely it will just drive the dollar down further.

    I reckon we’ll simply see more collapses in other places. 7.3 times as many.

    But that’s just MHO.

    Posted by WorstPresidentEva | July 14, 2008, 4:22 PM