More Fannie And Freddie Follies

As we await details of the Sunday Night Rescue of Fannie and Freddie, we learn today what prompted action by the Fed this weekend: Freddie's accountants were lying to the American people.

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter.

The proposal to place both companies, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.

Investors who own the companies’ common and preferred stock will suffer. Holders of debt, including many foreign central banks, are expected to receive government backing. Top executives of both companies will be pushed out, according to those briefed on the plan.

The cost of the government’s intervention could rise into tens of billions of dollars and will probably be among the most expensive rescues ever financed by taxpayers.

Got that?

1. Freddie Mac's accountants lied. They were much worse off in reality.
   
2. The housing market will continue to fall, meaning more losses for Fannie and Freddie.
3. Foreign Central Banks will get paid. Stockholders will get wiped out.
4. It will cost billions of our taxpayer dollars.
   

It gets worse.

“We have just had to nationalize the two largest financial institutions in the world because of policy makers’ inaction,” said Josh Rosner, an analyst at Graham Fisher, an independent research firm in New York, and a longtime critic of the government-sponsored enterprises. “Since 2003, when these companies’ accounting came under question, policy makers have done nothing.”

But only the losses are nationalized. The revenues will not be. Holders of preferred stock will continue to get money. Holders of common stock will get wiped out.

We're rapidly becoming a country of socialized losses and privitized profits. And nothing that I've seen from either candidate makes me think anything will change.

[UPDATE 11:28 AM:] Its official, the regulatory agency that monitors Fannie and Freddie, the FHFA, now is running both companies.

And yes, this means common stock in both companies has just been wiped out as worthless paper.