Fannie & Freddie Bailout – U.S. Is “More COMMUNIST than China” : Jim Rogers on CNBC
Fannie Mae(the common name for the Federal National Mortgage Association) was born in 1938 under the leadership of Franklin D. Roosevelt to ensure a supply of mortgage funds under all economic conditions and to help lower costs to buy a home. It became a shareholder-owned company in 1968. In 1970, Freddie Mac(the acronym for the Federal Home Loan Mortgage Corp.) was created to provide competition and essentially ensure that Fannie wouldn’t have a monopoly on government-backed mortgages. Freddie basically does the same thing: “Reduce the costs of housing finance and expand housing opportunities for all families, including low-income and minority families,” according to its website. They are both government sponsored and shareholder owned. They do not have direct contact with consumers; instead, they work with lenders. The job of Fannie and Freddie is to buy mortgages from banks, savings and loans, credit unions, and other lenders to ensure that mortgage funds are consistently available. Together, they hold or guarantee about 50% of U.S.’s outstanding home loans. Steep home-price declines and a rise in mortgage delinquencies and foreclosures have badly hobbled Fannie and Freddie. The 2 firms have registered roughly $14 billion in losses over the past year. “If they had failed, the damage to the mortgage and housing markets could have had a catastrophic effect on the economy and could have hurt Americans’ ability to secure home loans, auto loans, and other consumer credit,” Treasury Secretary Henry Paulson said. The stocks of both Fannie and Freddie have plunged over the past year -each from the mid-$50s to the mid-single digits.
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“The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is “more COMMUNIST than China is right now. You can see that this is welfare of the rich, it is socialism for the rich, it’s just bailing out financial institutions,” Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday.
Stock markets jumped after the U.S. government’s decision to launch what could be its biggest federal bailout ever, in a bid to support the housing market and ward off more global financial market turbulence.
But Rogers said in the long term the move spelled trouble. “This is madness, this is insanity, they have more than doubled the American national debt in 1 weekend for a bunch of crooks and incompetents. I’m not quite sure why I or anybody else should be paying for this. You certainly gonna see a huge jump in any financial institutions which owned a lot of Fannie or Freddie because they don’t have to worry about going bankrupt all of a sudden,” Rogers said. “Bank stocks around the world are going through the roof, that’s because they’ve all been bailed out. You don’t see the homeowners in Kansas going through the roof because they’re not being bailed out,” he added.
However, despite the rally in Asian and European markets, the decision to take over Fannie and Freddie is likely to cause more volatility and needs careful consideration by investors, according to Rogers. “It’s rarely good to jump in a moving bus and right now you got a lot of buses moving. I might short some more investment banks in the US, depending on how they rally over the next week, but other than that, I’ll just sit and watch,” Rogers said. He, who is short on U.S. bonds, said these are likely to fall while commodities may rally. “The 2 government-sponsored enterprises don’t have good loans on their books because everybody else took the good stuff and dumped the bad stuff onto Fannie and Freddie.”
From 2010, Fannie and Freddie will have to shrink their portfolios by 10% a year until they reach US$250 billion to reduce the risk to the taxpayer, according to the Treasury plan. “But this may put additional pressure on the housing market. That’s going to also ensure that house prices continue to go down. It’s going to be harder and harder to get a mortgage.”
“Investors should not pin their hopes on this year’s presidential election for a solution to the problems, as none of the candidates is likely to find one,” Rogers said. “This is a big huge MESS and neither one of them has a clue what to do next year. It’s going to be a MESS!”
(c) 2008 CNBC.com
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