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Friday, September 05, 2008

Fannie and Freddie Bailout

How will this play with respect to the election? Can McCain run against the bailout? Is there some way for Obama to use this to his advantage, e.g. by talking about the failure to impose adequate regulatory control under the Bush administration and how that will continue with McCain? I don’t think it matters much for the election except for the overall perception that things aren’t going very well, and that's bad news for the incumbent and for the incumbent's party:

U.S. Rescue Seen at Hand for 2 Mortgage Giants, NY Times: Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac ... that the government was preparing to seize the two companies and place them in a conservatorship...

The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend... The executives were told that ... they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt...

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history. ...

Under a conservatorship, the remaining common and preferred shares of Fannie and Freddie would be worth little, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. ...

    Posted by on Friday, September 5, 2008 at 07:20 PM in Economics, Financial System, Regulation | Permalink  TrackBack (0)  Comments (33)


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