Fannie Mae and Freddie Mac Go Bankrupt

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Martin D. Weiss, Ph. D. discusses the recent bankruptcy of the two largest mortgage lenders, Freddie Mac and Fannie Mae. In this issue of Money and Markets, Dr. Weiss explains how he expects Washington and Wallstreet will handle the situation.

Martin D. Weiss, Ph. D. discusses the recent bankruptcy of the two largest mortgage lenders, Freddie Mac and Fannie Mae. Dr. Weiss explains how he expects Washington and Wallstreet will handle the situation.

According to Dr. Weiss, both Washington and Wall Street are trying to persuade the public that the government will save us from financial disaster. But the real lessons already learned from these events are another matter entirely:

The first lesson learned was each successive round of the credit crisis is far deeper and broader than the previous. In 2007, the big news was big losses; in 2008, it's big bankruptcies. In March, the failure of Bear Stearns shattered $395 billion in assets. Just six months later, the failure of Fannie Mae and Freddie Mac is impacting $1.7 trillion in combined assets, or over four times more.

The second lesson was that, despite unprecedented countermeasures, Washington has been unable to stem the tide. Yes, the Fed can inject hundreds of billions into the banking system. But if banks don't lend, the money goes nowhere. And the Treasury can inject up to $200 billion of capital into Fannie Mae and Freddie Mac. But if their mortgage portfolio is full of holes, all that new capital is lost. And of course, the U.S. government has vast resources. But if the $49 trillion mountain of U.S. debts and the $180 trillion pile-up of U.S. derivatives are beginning to crumble, all those resources don't amount to very much.

The third lesson learned was that shareholders are the first victims. Bear Stearns shareholders got wiped out. Fannie Mae and Freddie Mac shareholders are getting wiped out. Ditto for shareholders in any of Detroit's Big Three that go belly-up, any bank taken over by the FDIC or any insurer taken over by state insurance commissioners.

The next lesson is that the primary mission of the Fannie Mae Freddie Mac bailout will ultimately end in failure. The taxpayer cost for just these two companies, up to $200 billion, is more than the total cost of bailing out thousands of S&Ls in the 1970s. But it's still just a fraction of the liability the government is now assuming. Why?

First, because the number of home foreclosures and mortgage delinquencies has now surged to a shocking four million and a substantial portion of the massive losses stemming from this calamity have yet to appear on Fannie Mae's and Freddie Mac's books.

Second, the U.S. recession is still in an early stage with surging unemployment just beginning to cause still another surge in foreclosures and mortgage delinquencies.

Third, even before Fannie Mae and Freddie Mac begin to feel the full brunt of the mortgage and recession calamity, their capital had already been grossly overstated.

For years, both Freddie Mac and Fannie Mae have effectively recognized losses whenever payments on a loan are 90 days past due. But in recent months, the companies said they would wait until payments were two years late. As a result, tens of thousands of other loans have also not been marked down in value. Both companies have grossly inflated their capital by relying on accumulated tax credits that can supposedly be used to offset future profits. Fannie Mae says it gets a $36 billion capital boost from tax credits, while Freddie Mac claims a $28 billion benefit. But unless these companies can generate profits, which now seems highly unlikely, all of the tax credits are useless.

"The most important lesson of all is as the U.S. Treasury assumes responsibility for $5.3 trillion in mortgages, it places its own borrowing ability at risk. The immediate reason the government decided not to wait any longer to bail out Freddie Mac and Fannie Mae was very simple: All over the world, investors were beginning to reject their bonds, refusing to lend them any more money. So the price of Freddie Mac and Fannie Mae bonds plunged, and the yields on those bonds went through the roof. As a result, to borrow money, Freddie Mac and Fannie Mae had to pay higher and higher interest rates, far above the rates paid by the U.S. Treasury Department. And they had to pass those higher rates on to any homeowner taking out a new home loan, driving 30-year fixed-rate mortgages sharply higher as well," Dr. Weiss states.

To read this issue online, please visit:


Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.

Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.

Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.

Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.

Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.

Money and Markets ( is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit


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