Fannie Mae and Freddie Mac: A Fall from Grace
CHICAGO, July 24, 2008 — "The recent collapse in the stock prices of Fannie Mae and Freddie Mac is just one in a series of blows to the stability of U.S. financial markets. The threat created by the failure of these two institutions, however, could be even greater than that posed by the collapse of Bear Stearns earlier in the year," says Adolfo Laurenti, senior economist of Mesirow Financial, in his July issue of Themes on the Global Markets.
In his July newsletter, Laurenti takes a closer look at the government's involvement with Fannie Mae and Freddie Mac in light of the recent collapse their stock prices, predicting some grim outcomes should these two financial giants ever truly fail:- The number of bank failures would surge and credit conditions would further tighten, as banks struggle to conserve their capital in a market where they could no longer raise capital with the sale of their mortgages.
- Pension funds for public workers would suffer heavy losses, as they invested heavily in Fannie Mae and Freddie Mack debt thinking it was almost as safe as treasuries.
- The dollar would depreciate and push oil prices even higher, as foreign governments also invested heavily in Fannie Mae and Freddie Mac, thinking it was similar in risk to the treasury market.
For these reasons, the "too big too fail" argument will carry the day, and we already see action by the Congress and the Treasury to step in and rescue the two mortgage giants. Unfortunately, though, the measures now moving through Congress are little more than a band-aid solution, and fail to address long-term issues in the secondary market for mortgages.
"One would hope that policymakers use the current crisis to avert a repeat in the future. We may not be that lucky. Congress is pushing to increase the regulation of financial markets without weighing the consequences of those regulations, and without forcing more accountability on Fannie Mae and Freddie Mac. Indeed, the risk is that the government, and politics, will play too large instead of too small a role in financial markets as we struggle to deal with this crisis in an election year," concludes Laurenti.
The July issue of Themes on the Global Markets as well as archived issues can be found at www.mesirowfinancial.com.
Mesirow Financial is a diversified financial services firm headquartered in Chicago. Founded in 1937, it is an independent employee-owned firm with $30 billion in assets under management and 1,100 employees in offices across the country. With expertise in Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate, Mesirow Financial has consistently met the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.
For more information, contact: Adolfo Laurenti, Mesirow Financial, 312.595.7129.
The Mesirow Financial name and logo are registered service marks of Mesirow Financial Holdings, Inc., © 2007, Mesirow Financial Holdings, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. Any opinions expressed are subject to change without notice. It should not be assumed that any recommendations incorporated herein will be profitable or will equal past performance. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy an interest in any Mesirow Financial investment vehicle(s).
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