A few hours ago the New York Times published an article claiming the federal government is planning to assume control of the giant mortgage-lenders Fannie Mae and Freddie Mac before the Asian markets open on Sunday.
I’m not an economics major, but let me try to explain how big a deal this is for those of you who don’t know. A year ago, the two companies were each trading at about $70. Now they’re trading at about $5. This makes the market extremely nervous, because these companies lend to BIG institutions (foreign governments, mutual funds, huge multinational corporations).
In fact, they own or guarantee an OUTRAGEOUS percent of the mortgage market (I think about 80%). Mortgages are the sort of loans people use to keep their houses until they earn enough money to fully pay for them. The debt securities they issue to the major borrowers mentioned above (which are backed up by the mortgages) total over $5 trillion dollars.
That’s a difficult number to understand; let me put it in perspective. The whole of the U.S. national debt is about $9.6 trillion dollars, and has been increasing at a rate of $1.93 billion per day since late 2007. That averages to about $31,000 per person in the U.S.
When the government takes over Fannie and Freddie, regardless of how they spin the language, they will essentially be guaranteeing the debts of those companies, or nearly DOUBLING the national debt. This is a gross oversimplification, and economics majors feel free to quibble with me in the comments. Obviously, Fannie and Freddie have assets as well.
Experts seem to differ on whether the takeover will bolster or sap the market’s confidence. One thing is certain: when a Columbia Business School economics professor is calling two of the biggest lenders in the world “zombie institutions,” things are not looking good.