Fannie Mae

The Congressional Budget Office estimates the guarantee for Fannie Mae and Freddie Mac will cost the government $25bn. This incorporates a 50% chance the guarantee will not be used at all before it expires in 2009. Even as Fannie and Freddie draw federal support, the recent housing bill does not require that they cut their dividends to shareholders. Confidence in the government sponsored companies is essential to the mortgage market and financial stability, but it is not clear why share holders who reaped benefits from their growth should not face the financial consequences of their investment.

Snapshot asks, is it possible to maintain stability and confidence, repay Fannie and Freddie's creditors, and allow shareholders to face the consequences of their investments?

CBO - Letter to Committee on the Budget
Portfolio.com - Parsing Paulson: The Fannie and Freddie Bailout
BNP Paribas - What happens next?

Promises by the U.S. Treasury and Federal Reserve to support Fannie Mae and Freddie Mac have not reassured shareholders. By noon Tuesday, shares of Fannie Mae dropped 23.5% and Freddie Mac plunged 24.9%. Given the loss of investor confidence in these mortgage finance companies, it appears that the promised equity investment by the Treasury may be utilized. In addition, Paulson proposed increasing Fannie and Freddie's $2.25bn credit lines to an undetermined amount to ensure "flexibility" and "minimize taxpayer risk."

Snapshot asks, what is the limit of taxpayer responsibility to maintain Fannie and Freddie's share price and help maintain financial stability?

Wall Street Journal - Bernanke, Paulson Aim for Stability with Fannie, Freddie Proposal
U.S. Treasury - Testimony by Secretary Henry M. Paulson, Jr.
Ben Bernanke - Semiannual Monetary Policy Report to the Congress

If the U.S. enters a deep recession, a bailout to Fannie Mae or Freddie Mac could threaten the United States' AAA credit rating according to a statement from Standard & Poor's. Government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac are large in size, have high common equity, and are highly exposed to a deteriorating housing market, leaving them vulnerable to a deep recession. If they go under and need a large cash infusion from the government, it could cost the country 10% more of GDP to service its debt.

Barron's - Is Fannie Mae the Next Government Bailout?
Wall Street Journal - Fannie, Freddie Could Hurt U.S. Credit
Bloomberg - U.S. Rating Threatened More by Agencies Than Bailouts, S&P Says