A Financial Perfect Storm
A disaster could be imminent!
by James Buchanan
We could be heading for a financial “Perfect Storm.” The Dow Jones kept plunging through new lows during the last few weeks as investor confidence waned. The Dow even dipped below 11,000 on Friday. The subprime crisis keeps claiming bigger and bigger victims. The financial giants Freddie Mac and Fannie Mae who handle 40 percent of all mortgage loans in the US were teetering on the edge of collapse last week. The second largest bank failure in US history (Indymac) just happened last week. Add to all this, the soaring price of oil, which is cutting more and more into consumer spending, which accounts for two-thirds of the US economy.
One news article notes “Troubled mortgage giant Freddie Mac is aiming to sell off three billion dollars in securities on Monday following last week’s meltdown, in a potentially decisive move to heal shattered investor confidence… The two government-chartered, shareholder-owned giants (Freddie Mac and Fannie Mae) underpin some five trillion dollars in home loans, and the meltdown in shares last week raised fears of a government bailout, or a possible worsening of the credit crunch. In highly volatile trade Friday, shares plunged some 50 percent for both firms before a partial recovery. Freddie Mac ended with a loss of three percent and Fannie Mae was down 22 percent, but both have lost around 75 percent since the start of the year… Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae’s is over 700 billion. Together they own or guarantee some 5.2 trillion dollars in loans, or about 40 percent of the total value of home loans in the United States. The two firms, which have no explicit government backing despite their government charter, provide liquidity to the housing market by buying mortgages and repackaging them into securities sold to investors. As such they play a key role in the housing system.”
There’s one little problem with the financial collapse of companies that own or guarantee $5.2 TRILLION in loans; it may not be possible to do anything about it. They’re just too big to help. (more…)