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5-Alarm Fire at Fannie, Freddie: Paulson Nixes Bailout -- for Now

Posted Jul 11, 2008 10:55am EDT by Aaron Task in Investing, Newsmakers, Recession, Banking
Related: FNM, FRE, LEH, JPM, BAC, C, XLF
Fannie Mae and Freddie Mac tumbled again Friday as speculation about possible government intervention accelerated, thanks to a NY Times story on the subject.

Hopes for a government bailout rose further - and stocks climbed from their initial descent - on reports Treasury Secretary Paulson would make a statement on the GSEs. But the optimism proved misplaced. Paulson downplayed the likelihood of a government bailout of Fannie and Freddie, and financial markets tumbled anew. 

"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,'' Paulson said in a statement. (Italics added.)

Still, Fannie and Freddie really are "too big to fail," as Dennis Berman, The Wall Street Journal's Global Deals Editor, and I discuss in the accompanying video.

"Bear Stearns is a pimple on a pimple" compared to Fannie and Freddie, Berman says. "These companies cannot fail. They cannot."

Given their huge importance in the mortgage-backed securities market, the government's main goal will likely be to ensure Fannie and Freddie's debt obligations, which will (hopefully) prevent systemic risk in the financial system. But shareholders of the two companies are likely to be left holding the bag - and an empty one at that.

In the accompanying video (taped prior to Paulson's comments), Berman and I also discuss whether the nationalization of the firms - in one form or another - represents the end of capitalism as we know it - or its possible salvation.

 

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