OT:
As most of us are aware, the US government has just placed our two largest mortgage companies, Freddie and Fannie in conservatorship, not receivership. [Sun Sep 7th]
For some insight as to how things got to this state [in 4 words
-- they cooked the books] click on
This is of concern to not only US citizens but also our readers in all countries because of the large amounts of the common and preferred stock, and mortgage backed CDOs owned by foreign financial institutions (including pension/hedge funds) and sovereign wealth funds.
Technically both Freddie and Fannie still exist. Indeed, this appears to be one critical reason for conservatorship and not recevership/bankruptcy. This has two vital effects: (1) As the stock still "exists," if an institution such as a bank claims they are holding this as "long-term investments," they don't have to write this down to fair market value [ i.e. zero], but can value at the purchase price. This preserves a considerable quantity of capital [on paper] for institutions [such as commercial banks and insurance companies] that *MUST* maintain a minimum loan reserve or capital base. (2) Just as important, this keeps the debts off the US governmental books.
Some of the recent news articles have published the CBP [Congressional Budget Office] estimates of "only" a 20 billion dollar cost to the taxpayer. This is under "best case assumptions," and assumes that the CDOs issued by Freddie and Fannie maintain their value, being backed by actual real estate, and the existence of huge amounts of CDSs [Credit Default Swaps] insuring against surges in defaults.
The real numbers, based on the historical experience with the earlier S&L melt-down and the RTC indicate the likely real US tax payer exposure to be in the range 1.3 to 1.6 trillion $ when the probable value of the real estate collateral is considered. E.g., just because there is a 500,000$ mortgage on a house does not mean that that much will be collected if it must be sold.
A very considerable complication is the financial stability [or even existence] of many of the counter-parties to the CDS "insurance" on the bonds. If significant amounts of these CDss are uncollectable, the potential tax payer exposure could reach
3.5-4.5 trillion dollars. Even if the counter-parties are able to meet this huge demand, this will extract 1.5 to 2.5 trillion dollars from the financial markets further stressing these organizations, and depleting the capital of many of them below regulatory minimums.for more complete information click on