US Government Takeover of Freddie Mac and Fannie Mae: The Socialist States of America?
The nationalization of Fannie Mae and Freddie Mac, the two companies that own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt, shows that the U.S. is “more communist than China right now”, said Jim Rogers, CEO of Rogers Holdings.
“America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it’s just bailing out financial institutions,” Rogers said.
The US government’s nationalization of Freddie Mac (FRE) and Fannie Mae (FNM) is the largest federal bailout of all time, and the world stock markets soared after the decision. But Rogers said in the long term this is a very dangerous move.
“This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I’m not quite sure why I or anybody else should be paying for this,” Rogers said.
European stocks are up on Monday, led by banks. UBS was up 11 percent, BNP Paribas up 8 percent, Credit Agricole up 11.1 percent and HBOS up 13.8 percent. That’s huge movement.
From 2010 on, Fannie and Freddie will have to shrink their portfolios by 10 percent a year until they reach $250 billion, to reduce the risk to the taxpayer, according to the Treasury plan. But this may put additional pressure on the housing market, Rogers said.
“That’s going to also ensure that house prices continue to go down. It’s going to be harder and harder to get a mortgage.”
There will be a jump in the stocks of companies that owned any substantial stake in Freddie or Fannie, because they no longer have to worry about going bankrupt. But what about the US taxpayer?
“Bank stocks around the world are going through the roof, that’s ’cause they’ve all been bailed out. You don’t see the homeowners in Kansas going through the roof ’cause they’re not being bailed out,” he added.
What does it mean for The Common Sense Investor
It’s undoubtedly bad news, but what does it mean for your wallet?
By all accounts, Fannie Mae was the more stable of the two and could have weathered the storm, but the government decided that if they took over Freddie Mac, and not Fannie Mae, the shock to investor confidence would have destroyed Fannie Mae anyway. I don’t buy that, but that’s the case they made. Either way, what’s done is done, and as investors, we need to address realities and find a way to make money from them, not talk about what should have been.
Short term, US bonds will likely fall and thus commodities will rise, but there isn’t much else to say. This really is a “sit and watch” type period for Common Sense Investors. Things will get hectic, there will be more volatility, but overall, if you continue on the Common Sense path of investing in solid, well managed companies, you will survive this market. In ‘good’ markets and in ‘bad’, there are always opportunities.
