'Fannie Mac'... Depression-era gloom is premature, and may be dangerous

GDO Report

It’s not just Bear Stearns, which you helped rescue from the consequences of its decisions, or IndyMac, which now owns the distinction of having been the object of a real-life “run on the bank,” or Freddie Mac and Fannie Mae, about which the talk runs from bailout to nationalization to almost everything that doesn’t have the word “collapse” in it. Nor is it just North Carolina-based Wachovia, which was already reeling before inspectors descended on Wachovia Securities near the end of the week.

Even if you have no investment portfolio, no IRA, no 401(k), no savings, not even a checking account, you’re deluding yourself if you believe you have no stake in the stability of the banking system. Similarly, those who imagine that a crash would be a great equalizer, bring all those fat cats down to your level and teach ’em what it’s like to put in a hard day’s work, pump their own $4 gas and skip meals, are indulging in a Hollywood fantasy. It doesn’t work that way — even if somebody exposes all those millions tucked away in secret overseas accounts.

This isn’t a fear-itself lecture, but it is absolutely true that fatalism can make things worse than they are, because fatalists tend not to take, support or oppose action. This is not a sit-and-watch moment.

Federal Reserve Chairman Ben Bernanke spent much of the past week analyzing and summarizing and trying to steer his listeners in Congress away from the extremes: panic and denial. True, that’s his job — talk about how it’s all going to pass in due time, and praise Wells Fargo for not getting into the subprime mess over its head. But it has its roots in reality.

Some bank failures are likely, but the numbers in mortal peril are small. As one analyst noted, everybody’s feeling some pain, not all of it from the foreclosure crisis; but it isn’t that the system itself is sick unto death; it’s that some banks are more vulnerable than others.

This is going to be a whole-body experience for America. In one instance, a bailout or a hand up might be in the public interest; in another, it might be bad medicine. Good judgments or bad ones, not fate, will tell the tale. Stay engaged.

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US Treasury to bail out Fannie Mae and Freddie Mac

WASHINGTON - US Treasury Secretary Henry Paulson has unveiled measures to bolster housing finance organisations Fannie Mae and Freddie Mac, stressing their key role in the US housing market.

"Fannie Mae and Freddie Mac play an important role in our housing finance system, and they should continue to play this role in their current forms as shareholder-owned companies,'' White House press secretary Dana Perino said.

"This evening, after working with the companies, the Federal Reserve, and other regulators, Treasury Secretary Paulson outlined a plan that we believe will help add stability during this period. President (George W.) Bush directed Secretary Paulson to immediately work with Congress to act on this plan,'' she said.

"It is crucial that Congress quickly works to enact this legislation as a complete package along with the strong oversight reform legislation recently passed in the Senate,'' Ms Perino said.

Mr Paulson said the "central role" the two played in US real estate financing meant they should continue to respond to shareholders and not be taken over by the Federal Government.

To protect them from liquidity problems, Mr Paulson said the two organisations would get a bigger credit line "temporarily". He did not give details on the amount of the credit line or terms.

And to ensure Fannie and Freddie can do their jobs, the Treasury Department would get temporary authority to buy their shares should that be necessary, Mr Paulson said.

"We are grateful for the leadership of Secretary Paulson and (Fed) Chairman (Ben) Bernanke," Fannie Mae chief executive officer and president Daniel Mudd said.

He urged Congress to deliver "swift passage of the new legislative proposals, as well as the important initiatives underway to assist homeowners and help restore stability to the housing market".

"We continue to hold more than adequate capital reserves and maintain access to liquidity from the capital markets," Mr Mudd said.

"Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market.

"We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future."

Freddie Mac is aiming to sell off $US3 billion ($3.1bn) in securities tomorrow following last week's meltdown, in a potentially decisive move to heal shattered investor confidence.

The two government-chartered, shareholder-owned giants underpin some $US5 trillion in home loans, and the meltdown in their shares last week raised fears of a possible worsening of the credit crunch.

Shares of both companies, which have been trading at levels last seen in the early 1990s, rallied after Mr Paulson and Mr Bush scrambled to reassure the market about the companies' health.

Earlier this year, the Federal Reserve took the unprecedented step of offering direct loans to investment banks.

Meanwhile, federally seized IndyMac Bank is due to reopen this week after suffering one of the biggest bank closures in US history as the troubled US mortgage industry struggles to stem further meltdown.