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Millionaire Now! by Larry NusbaumThis blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth". |
What Is Washington Smoking?
Yesterday the New York Times ran a long piece titled House Approves Sweeping Effort to Help Housing. In the piece were the following words:
Perhaps most significantly, the legislation hardens the government’s long-implicit assurance that it would step in to rescue the two mortgage giants who together own or guarantee about $5.2 trillion of the nation’s $12 trillion in mortgages. Currently, Fannie Mae and Freddie Mac guarantee financing for about 80 percent of new mortgages.
To accommodate a potential rescue for Fannie Mae and Freddie Mac, the bill raises the national debt limit to $10.6 trillion, an increase of $800 billion. (That's 8.2%.)
The Treasury Department has said it hopes never to use the authority to spend unlimited taxpayer funds — perhaps hundreds of billions of dollars — to maintain the solvency of the mortgage giants because they are in sound financial condition. Still, shares in the two companies rose sharply on Wednesday in a sign of the market’s positive view of having a federal rescue plan in place. (The following day -- Thursday -- they plummeted.)
The independent Congressional Budget Office said on Tuesday that the rescue plan for the mortgage finance companies should appear on the federal budget as a $25 billion charge in fiscal years 2009 and 2010, but officials conceded that this was only an estimate based on complicated probability calculations.
What is Washington smoking? Washington believes Fannie and Freddie "are in sound financial condition." How can anyone honestly know? The one and only thing we know about this financial crisis is that it's riddled with cockroaches. The losses and the writedowns just keep on coming. Many of the mortgages Fannie and Freddie own are still low-monthly payments (e.g. interest only). These are about to ramp out and then become unaffordable, at which point hundreds of thousands more will abandon their homes. Mr. Market is saying they're not in sound financial condition. Yesterday, Fannie's stock fell 19.9% and Freddie's 18.4%.
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