Tuesday, September 9, 2008

Understanding the Bailout

One important part of the Fannie and Freddie takeover is that is can be distilled down for the masses to understand exactly what is happening. Not everyone has a finance or legal background to read through all of the technical information, but those that do can decipher it for us. The Philadelphia Inquirer does a good job with this in the article titled What will happen in the wake of bailout. Lets take a look -

If you were hoping to retire on your Fannie Mae/Freddie Mac stock portfolio, you'll need another plan quickly.

The takeover was designed primarily to turn Fannie and Freddie debt into government debt, which global capital markets would be more willing to buy. That will increase the amount of funds available to the primary mortgage market.

In addition to promising $200 billion in capital if necessary, the government now holds about $1 billion of senior preferred stock in each company, and it pledges to buy $5 billion in mortgage-backed securities.

Now holding all the cards, Uncle Sam will be first in line to get its 10 percent dividend.

There will be more mortgage credit available, and that will reduce concern about getting enough money to buy a house, meaning price declines will slow.

Good synopsis for the layman. The article also predicts that the bailout may slow down the slump in housing prices.

More of the old "capitalist" issue of socializing the losses but privatizing the profits. It appears that this may be tweaked a bit, but it will be a wait and see if taxpayers actually get any part of the dividend.

Someone else describes the bailout is kicking the can down the road - just putting of the problem for a few years. Hoping the patch holds up and everything is OK as we move ahead. One big aspect appears to be "wait and see".

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