That’s what one gets from the NYT article

Capitalism, as practiced by the US now, faces new tests, almost every month.

Many termed capitalism committed suicide when Fed. bailed out Bear Stearns.

If Bear Stearns was too big too fail, Fannie Mae and Freddie Mac are exponentially bigger.

Online space is buzzing with different possibilities. Freddie and Fannie are leveraged by more than 100 times, when one includes the guarantees.  Their direct exposure is over $1 trillion, and with guarantees, it’s nearly $5 trillion – half of US mortgage market size. Capital base – hardly $25 billion or so, with unreported losses and accounting jugglery. 100 times leverage means a 1% loss in your asset base makes your net-worth zero.

The housing finance companies in India typically maintain a leverage of 10 or less, don’t offer loans beyond mostly 20-years, simple vanilla floating and fixed, and don’t take exposure of more than 85% of the asset value. There isn’t any 2nd mortgage. Housing loan market size in India would be hardly 10% of Indian economy, unlike nearly 100% of the US economy.

Above illustrates a comparative picture on how much the US economy, in all aspects are leveraged, compared to the emerging economies.

Freddie and Fannie have so far written down $11 billion. If one takes the nearly $400 billion written down by other financial institutes, with exposure from other half of the housing market (and even accounting for other losses); one sees Freddie and Fannie has a long way to go.

Another $100 billion…or $400 billion+, by the time the housing market stabilizes? No one knows for sure. And that’s what leads to the volatility in its stock-prices and bond-prices.

True, the quality of exposure for Freddie and Fannie are reported to be much better, as the mortgages were mostly prior to 2006.

Freddie and Fannie have lost 40% and 25% in stock-values in last two trading sessions. And they quote at a 17-year low or so. Ex-policymakers have already termed them as ‘insolvent’.

One can be certain that Bernanke et al. won’t let Freddie and Fannie fall. Then the public debt goes up from $9 trillion to $14 trillion. Socialize losses and privatize profits continue unabated, once started. The market will function normally and bankers will continue to take hefty pay-checks and bonuses. Alternatively, the system crashes.

Few days back, Warren Buffet stated that the fire engine was there even before the fire happened (for Bear Stearns) probably ensures there’s unlikely to be another fire.

The policy-makers approach, as reported in media as of now, looks like they are jawboning the bears of these counters. They won’t bail them out till the last moment when some form of a bail-out looks inevitable.

One can empathesize with pensioner-investor shareholders of these firms. They must be wondering whether to sale at 17-year low prices or wait till it get zero.

Policy-makers in the US have been doing same jawboning with inflation for quite some time. They have also been doing so with speculators in oil and commodities markets. They have done so with dollar-bears as well. 

As I see it, policy-makers in the US seem to be at a loss now about what markets mean at the end of Bush era as it was on external policy-front in its beginning.

Its better they give the control to the public than to the lobbyists.

Probably stop oil speculation can help in saving Freddie and Fannie in a sustainable way, better than the ‘jawboning-with-no-power-to-act-but-bail-out-in-the-end-with-tax-payers’-money-approach’.

Alternatively, a firm decision by the Saudis (and OPEC) to review their petro-dollar linkages can solve the problem. They must rethink the value of dollar in this new-age of capitalism.

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