As the New York Times acknowledged Sunday, “The plan to bail out the firms will probably do little to stop home prices from falling further. And foreclosures are almost certain to rise.
“The bailout will give the mortgage industry a stability that we haven’t had in a couple of years,” Rich Cosner, president of Prudential California Realty told the Associated Press. “But frankly no, it won’t help (struggling borrowers) to refinance.”
Its real aim is to bail out the banks which bought Fannie’s and Freddie’s unsecured debts as investments with the understanding that the US treasury ultimately stood behind these so-called “government-secured enterprises.”
The immediate cost of the bailout will be borne by taxpayers as well as shareholders, who will see their investments wiped out. Part of the plan announced Sunday authorizes the government to buy up existing assets at a nominal price of less than a $1 a share. A significant portion of these investments are held by mutual funds handling 401K plans that constitute the sole retirement savings for large sections of the American workforce.
One of the triggering factors in the government intervention was apparently the dumping of Fannie-Freddie holdings by Asian and other foreign investors. Bank of China, the country’s third-largest bank, announced at the end of August that it had shed some $3.14 billion in debt holdings from the two companies over the previous two months. Other central banks were apparently following suit.
Russia’s central bank, meanwhile, reportedly dumped some $40 billion in Fannie Mae, Freddie Mac and Federal Home Loan Bank securities over the course of this year and further cuts were expected.
The flight from investment in these government-backed companies clearly raises the specter that a similar pull-out could be threatened from US government securities. At present, the US economy is dependent upon foreign investors, principally in Asia, purchasing up to $20 billion in US agency debt monthly.
But wait! Would this be a form of nationalization?