Fannie Mae Preferred S (FNMAS)

[mhill_fin]

GSE Artificial Crisis

Good GSE article:

For instance, in the 1980s the government took over large numbers of savings-and-loan associations, businesses that were driven into the appearance of non-profitability by suddenly-changed capital requirements. The Supreme Court ultimately ruled in the Winstar case that shareholders had been bilked and the federal government was responsible for some $30 billion in claims – at a time when $30 billion was real money.

Now history is repeating itself with Fannie Mae and Freddie Mac.

The Fiscal Cliff Is Not The Only Fake Crisis

First, the two organizations had losses – but they were not broke. They had assets of $1.5 trillion, enough to fend off any conceivable claims. They also had tremendous leverage in the marketplace (an 80-percent market share), ongoing revenues and had never shut down or failed to make payments. There was no need to nationalize them. They could have paid off claims and settled with their creditors in any event. Meanwhile, GM, AIG and a number of major banks could just as easily been taken over by the government, but magically that was not the case.

Second, when Fannie Mae and Freddie Mac were nationalized their share values plummeted. As it happens, community banks – under federal regulations – were encouraged to own preferred stock in the GSEs as part of their capital base. When the companies were federalized small lenders lost $16 billion in capital – losses many could never re-capture. The result was hundreds of small bank failures and increased market share for big lenders.