Over the weekend, (when investors can't do anything about it) the Government announced that it would take over Fannie Mae and Freddie Mac, the 2 Government sponsored agencies that provided funding and liquidity for the mortgage market in the US.
These formerly private firms are to be fully absorbed into the US government, leaving their investors with worthless shares of stock. This is being done since the firms are essentially insolvent and yet are still integral to the mortgage market in the US.
This is an example of the system breaking down. In a healthy, balanced economy, home lenders should never become insolvent, nor should home prices collapse or there be a sudden glut of homes on the market in a specific area.
This should be a warning bell that things are very, very bad when a pillar of the American system crumbles under mismanagement and excessive risk-taking. One has to wonder what will happen to the money lend to Fannie and Freddie by the big banks, will the Government now make good on these debts? If not, they'll have to be prepared to take them over as well!
Derivatives based interest rate changes and mortgage insurance started to fail- companies that wrote them couldn't pay, and the holders of the derivatives couldn't get the money they were expecting. Alan Greenspan said these things did not need to be regulated. It is clearly apparent that nothing could be further from the truth. There has to be a clearing house and an enforced market that insures that people make good on their deals.
The end result is that we the taxpayers are going to make good on these deals, we'll be getting the bill for fannie and freddie in one way or another, and so far it looks like the money will be going to the crooks.
