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Fannie, Freddie and the Looming Risk

John Mauldin

John Mauldin

John Mauldin gets cited here at Intown Insider quite often.

I read his Thoughts From The Frontline weekly newsletter. If you are reading this then click on the link and sign up for his insightful advice.

His recent letter from last week includes some cogent, immediate and disturbing analysis – it begins with the following:

“We also (sadly) re-visit Freddie and Fannie and examine the risks that they put into the markets. Risks, by the way, that were sanctioned by regulators and encouraged by a Congress that took in hundreds of millions in campaign contributions and lobbying fees. We (the US taxpayer) have taken on a huge risk and potential loss for that paltry few hundred million. Sadly, those who encouraged that risk will by and large be voted back into office rather than ridden out of town on a rail (an old US custom, rather barbaric, but one which should maybe be revived for this purpose).”

I am very concerned about this intricate problem. As John says, it’s all about the “spreads.” Margins and profitability at banks have been smacked down hard. John writes:

“Warren Buffett has stated that Freddie and Fannie are toast, as have many establishment analysts. Buffett told CNBC that the firms had no net worth and would need tens of billions of capital to shore up their balance sheets. Since their combined capitalization is less than $6 billion, it is unlikely that there is any way they could get even a sovereign wealth fund to come to their aid in the form of stock.

Congressional oversight committees estimate losses for Fannie and Freddie to be $25 billion, given current housing values. As home values drop, those estimates keep going up. Also, as the economy gets worse, those losses will increase. Independent estimates are double that or more. If only that were the extent of the problem…”

Damn. There’s about 8 pages of this at Thoughts From The Frontline, so check it out.

If you want to know more about what is going on, then John is your weekly sage.

Thanks John for doing what you do.

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