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Your Taxes: Underwriting Your Debt

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Insolvency insoluble for Fannie, Freddie.

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Minyans shouldn't be surprised by the comments of former Federal Reserve president William Poole: "Congress ought to recognize that these firms [Fannie Mae (FNM) and Freddie Mac (FRE)] are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer."

Some time ago, we challenged the GSEs (government sponsored enterprises) business model, saying they were making extremely thin margins on very heavy leverage: It was highly probable that squeezing those margins would invalidate the business model and cause insolvency very quickly.

To most people, that seemed like an entirely hypothetical scenario when these stocks were thriving and the companies were carefully hiding their Achilles' heels.

Now, it's reality, but it still isn't clear whether the lessons of leverage will finally be learned. Government officials certainly refuse to grasp them, since leverage is their only power. But the market understands leverage all too well, and it's exacting the cure.

The GSEs are the system's poster boys for leverage. Let's not forget how we got here: The Fed drove real interest rates negative (and they're still there), thus making "fake" capital available for widespread borrowing and spending.

Now the debt can't be borne; the Fed's devalued the dollar to death and thus destroyed any wealth the middle class had.

It's breathtakingly cowardly - but then, I expect nothing less from bureaucrats.

We the people, unfortunately, still haven't learned that lesson. We've rolled over and given away liberties to our government in order to "be safe"; now, we're about to give still more power to the bureaucrats who took our wealth away.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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