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Don't Play Poker With Uncle Sam

Penelope Wise
27 July, 2008

Freddie Mac's and Fannie Mae's shares closed at 8.27 and 11.55 on Friday; their highs in the last year were 67 and 70. Last Sunday Henry Paulson, with a face like thunder, had to stand on the steps of the Treasury to announce that the taxpayer would front up USD300bn in extra capital for the two sacred cows, or perhaps one of them is a bull.

Some people might think that the shares are a bargain at today's prices, but be careful! You would be gambling across the table from Uncle Sam, and he has cards you couldn't even dream of holding. To find out what might happen to you, look across the pond to the UK, where the government spent GBP50billion (USD100bn) of taxpayers' money trying to prop up failing S&L Northern Rock before nationalizing it. Lots of people bought Northern Rock's shares after the government saved it; now they will be lucky to get back the price of a train ride to London where they can protest outside the Treasury. No-one will listen.

Why do governments get themselves in such a mess? Fannie Mae and Freddie Mac may be big, but are they too big to fail? This may not be the moment to let them go, but surely the writing is on the wall for taxpayer-sponsored cheap mortgage lending? The US government half privatized them in the 1980s - it should have gone the whole way during the last ten years of booming capital markets, when there would have been ample capacity for the privatization to have been completed.

So what will actually happen? Well one thing is for certain, the government won't let them go before the election in December, so if you do fancy a punt, just make sure you get out before next January, because that provides a golden moment for an incoming President to blame everything on the previous administration. But neither of the two possible Presidents is likely to do anything to worsen the credit crunch, so the drip-feed of capital into the two wounded mortgage beasts is likely to continue until times improve - and by then everyone will be happy just to push the whole affair under the carpet, where it will stay until next time.

No wonder Mr Paulson was blushing. He must have wished the earth would swallow him.


About the Author

Penelope Wise

Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.


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