This diary is my first and will have a very brief introduction and a link to a market observer who will make the case that the bailout of Fannie Mae and Freddie Mac, the two government sponsored entities ("GSE")'s which issue most of the mortgage debt in the United States, is an unlwaful, unwise and dangerous act of moral hazard which amounts to a vast wealth transfer from taxpayers (and especially taxpayers who have not bought more house than they can afford, who have not speculated in housing, and renters) to foreign central banks, large asset managers such as Bill Gross's PIMCO, and other speculators who bought Fannie and Freddie debt with an EXPLICIT NON-GUARANTEE of the Federal Treasury.
The key point is Fannie and Freddie are the WORLD'S LARGEST HEDGE FUNDS, who borrow money cheaper than banks because of am implicit government backing, by selling their debt to the Bank of China, the Bank of Japan, PIMOC, etc, then in turn buy mortgages from banks. But not only have they bought conforming mortgages, (full doc, good FICO, less than $417k principal) they also have bought $1T of subprime and ALT-A ("liar loan) mortgages which have market values far less than face value, and falling.
Fannie and Freddie have $5T of assets on less than $50B of stated equity. They are the worlds most leveraged and largest hedge funds. Since US the housing market is down 15% to date more are less, they are potentially sitting on loses than exceed their equity more than tenfold.
These two hedge funds are INSOLVENT. But the US Government's response is to make YOU pay for the losses incurred by the investors in these hedge funds!
On Monday, a plan will be announced that will make YOU responsible for their gambling losses. This has the potential to dramatically increase our Treasury debt, which will in turn spike interest rates higher, which will neuter any positive impact from the bailout to the housing market, and worsen the housing market when interest rates eventually rise. This rescue is A RESCUE OF THE FOREIGN CENTRAL BANKS, ASSET MANAGERS AND INSURANCE COMPANIES THAT HOLD FANNIE AND FREDDIE DEBT AT OUR EXPENSE.
Please read the attached link for a fuller explanation.
http://market-ticker.denninger.net/...