U.S. Near Deal on Fannie, Freddie (September 6, 2008)
Plan Could Amount to Government Takeover
WASHINGTON — The Treasury Department is putting the finishing touches
to a plan designed to shore up Fannie Mae and Freddie Mac, according to
people familiar with the matter, a move that would essentially result
in a government takeover of the mortgage giants.
The plan is
expected to involve putting the two companies into the conservatorship
of their regulator, the Federal Housing Finance Agency, said several
people familiar with the matter. That would mean the government would
take the reins of the companies, at least temporarily.
also expected to involve the government injecting capital into Fannie
and Freddie. That could happen gradually on a quarter-by-quarter basis,
rather than in a single move, one person familiar with the matter said.
Wow. This is big
news. I always knew that this would all end up with a gigantic
taxpayer bailout; I just can’t really believe it is happening this
fast. This tells me that things are far worse than publicly admitted.
Remember, it was just a couple of weeks ago, during congressional
hearings on the matter, when Hank Paulson was handed an $800 billion
blank check and he said that it was "unlikely" that any money would be
needed at all for Fannie and Freddie. And now, a scant few days later,
here we are reading about their takeover by the government. Either
Hank was thoroughly in the dark, or he was contradicting himself while
working furiously behind the scenes to engineer this moment.
Now the mysterious
rise in the dollar the past few weeks makes more sense. Most likely
the Treasury and foreign central banks worked in concert to create a
"cushion" underneath the dollar in anticipation of this event. Now
they will try to hold it there.
In a world of free
markets, this would be terrible news for the dollar, because it would
imply two things: 1) that lots of new dollars will be borrowed into
existence to pay for the bailouts, and 2) that the US financial system
is in pretty bad shape. Who would want to hold dollars under those
Remember, the bonds
guaranteed by Fannie and Freddie comprise some of the largest foreign
holdings of US debt, totaling in the hundreds of billions of dollars.
If those bonds were ever dumped, then the dollar would decline
dramatically. That is what is being fought here as much as anything.