Fannie Mae (FNM), Freddie Mac (FRE) Layered with MORE Risk

This could be the most inaccurate headline I've seen in a long time 'Government Gives Plan to Help Fannie, Freddie' - funny, I see it exact the opposite. Two overleveraged companies, and the government is giving them more rope to potentially hang themselves - but not to worry because federal tax dollars are at the ready when/if these fall off the cliff. How quickly things change, eh? Just a week ago Barron's was talking about the potential to be the next government bailout [March 10: Barron's Cover Story: Is Fannie Mae (FNM) the Next Government Bailout?] Now, we want to increase their leverage - which is exactly what is taking down institutions like Carlyle Group, Bear Stearns, et al. Again, I cannot make these things up - but this is the desperation to get the mortgage market going by any means necessary.

• The government on Wednesday relaxed capital requirements at Fannie Mae and Freddie Mac as part of a plan to inject an additional $200 billion of financing for home loans.
• The initiative, which will require Fannie and Freddie to raise substantial funds, is part of a broader government strategy to ease a credit crisis that has made it difficult for consumers and businesses to borrow, and spread fear throughout global financial markets.
• The Office of Federal Housing Enterprise Oversight, which oversees the government-sponsored companies, said the mandatory cash cushion for Fannie and Freddie -- now nearly $20 billion for the two -- will be reduced by a third under the new plan. The freed-up money will go toward buying mortgages of struggling homeowners, enabling them to refinance into more affordable loans.
• The capital requirement for each company will be reduced from the current 30 percent to 20 percent, and further reductions will be considered in the future. Fannie and Freddie will raise additional capital through special sales of stock or cuts in dividends.
• It was the third step the government has taken in recent weeks to allow Washington-based Fannie and McLean, Va.-based Freddie to shoulder larger burdens in the mortgage market despite their multibillion-dollar fourth-quarter losses and expectations of further red ink this year.
• The $168 billion economic stimulus package enacted last month included a temporary increase in the cap on mortgages that the companies can purchase or guarantee, from $417,000 to $729,750 in high-cost markets. And, as a reward for filing timely financial statements following multibillion-dollar accounting scandals, Fannie and Freddie were freed on March 1 of a combined $1.5 trillion cap on their mortgage-investment holdings.

I don't even know where to start... this is right up there with corn ethanol subsidies. Again, these are implicity backed by your tax dollars so if things devolve you know who will be on the hook for the bailout - but talk about tempting fate.

No position