Freddie Mac and Fannie Mae, the “government sponsored” enterprises that are supposed to bail us out of the current mortgage crisis, may be in danger of collapsing, according to William Poole, the former president of the St. Louis Federal Reserve, who told Bloomberg the companies are already “insolvent.”
As you might expect, this didn’t exactly instill confidence in the GSEs (Government Sponsored Enterprises). Their stocks are down, way down, and people are staring to wonder what will happen if they fail?
Unfortunately there’s no good answer, all we seem to know is that it would be really, really, really bad if the government was forced to step in and bail out the GSEs, but it would probably be worse if they just let them fail.
“If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns,” says Sean Egan, head of credit ratings firm Egan Jones. “It could throw the economy into depression or something close to it.”
In case you’re wondering what Freddie and Frannie do — Fortune explains: they “help the mortgage market function by purchasing pools of loans and packaging them into securities. If one or both couldn’t function, the result would be chaos.”
Meanwhile,Treasury Secretary Hank Paulson maintains that Freddie and Frannie are going to be fine:
“Fannie Mae and Freddie Mac are also working through this challenging period,” Paulson said. “Their regulator has made clear that they are adequately capitalized.”
As of this post, Freddie and Frannie have lost about 43 percent and 25 percent of their value (respectively) since Monday.
Fannie and Freddie Stocks Continue Their Slide [Washington Post]
Lehman Shares Sink as Fannie, Freddie Plunge Further [Bloomberg]
The Fannie and Freddie doomsday scenario [Fortune](Thanks, Chris!)