Fannie, Freddie too big to fail, else a trillion dollar meltdown

Fannie Mae and Freddie Mac, the largest buyers of US home loans, are too big for the government to allow them to fail, leading Republican and Democratic lawmakers said. A government takeover is being considered if their problems get worse. Shares in Fannie Mae are down 84% from the Oct 2007 highs, while Freddie Mac is down 87% - levels not seen since 1991.

Congress created Fannie Mae during the Great Depression and formed Freddie Mac in 1970. The companies own or guarantee about half of the $12 trillion of US mortgages. The companies' failure would deepen a housing recession that already is the worst in a quarter century. Freddie Mac owed $5.2 billion more than its assets in 2008Q2, making it technically insolvent, while Fannie Mae's assets fell 66% to $12.2 billion, and may be negative next quarter.

- This is huge. If the US government decides to do a bailout, the US dollar will head straight down towards zero, and commodity prices will immediately execute a warp drive and head not only for the stars, but quite possibly the next galaxy. Like the Fed, Congress is now stuck between a rock and a hard place. They have two choices : collapse the dollar, or collapse the housing market, and with it, the rest of the economy. Neither choice is very palatable, and doing nothing is not acceptable either. This has the potential to turn out to be a multi-trillion-dollar meltdown.

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