With the Economies booming post 2007, Investors were not used to watch their financial stocks plummet more than 70 percent in close quarters. American taxpayers were ignorant of left holding defaulted mortgages and abandoned homes while executives who presided over balance sheet implosions walked away with millions. Taxpayers were also given the bill to bailout poorly managed Bear Sterns.
Over the course of this 18-month financial crisis, US lurched from financial land mine to land mine. The crisis from the fallout of Fannie Mae and Freddie Mac, the giant government-sponsored enterprises set up to provide affordable housing across the nation was a setback. By issuing debt, these shareholder-owned companies guarantee or owned more than $5 trillion in home mortgages. The majority of them were good, but because of the subprime mortgage mess, the percent that default increased over the past 18-months.
Investing in Fannie Mae and Freddie Mac seemed like conservative investments. These were government established companies. The implied guarantee is what drove Fannie and Freddie’s business models. However, investors were foolish to think they were still government backed and therefore were guaranteed.
The reason why crisis hit these two companies was because they were not required to keep as much cash on their books as banks. But with so many mortgages defaulting, there low cash supplies lead them in a dangerous state. To raise the necessary capital to stay afloat, these companies called on the American taxpayers to bail them out.
Speculation that mounting losses at Fannie Mae and Freddie Mac would require billions of dollars in additional capital had fueled a firestorm, sending stock investors fleeing. Fear spread across financial markets after the government offered no hint that it would step in to help the companies.
The companies combined have about $1.6 trillion in debt outstanding, much of which was held by central banks around the world. They used the money to fund the portfolios and securities that lawmakers have increasingly relied on to support the ailing housing market.
Over the course of this 18-month financial crisis, US lurched from financial land mine to land mine. The crisis from the fallout of Fannie Mae and Freddie Mac, the giant government-sponsored enterprises set up to provide affordable housing across the nation was a setback. By issuing debt, these shareholder-owned companies guarantee or owned more than $5 trillion in home mortgages. The majority of them were good, but because of the subprime mortgage mess, the percent that default increased over the past 18-months.
Investing in Fannie Mae and Freddie Mac seemed like conservative investments. These were government established companies. The implied guarantee is what drove Fannie and Freddie’s business models. However, investors were foolish to think they were still government backed and therefore were guaranteed.
The reason why crisis hit these two companies was because they were not required to keep as much cash on their books as banks. But with so many mortgages defaulting, there low cash supplies lead them in a dangerous state. To raise the necessary capital to stay afloat, these companies called on the American taxpayers to bail them out.
Speculation that mounting losses at Fannie Mae and Freddie Mac would require billions of dollars in additional capital had fueled a firestorm, sending stock investors fleeing. Fear spread across financial markets after the government offered no hint that it would step in to help the companies.
The companies combined have about $1.6 trillion in debt outstanding, much of which was held by central banks around the world. They used the money to fund the portfolios and securities that lawmakers have increasingly relied on to support the ailing housing market.
So were government funded companies also not safe for investment, and did investment pundits learn anything from this fall out?
Source: Financial Times, Swapnil Pawar (CIO, Karvy Wealth)
Read more on demystifying facts of Global Economic Crisis by Swapnil Pawar, CIO, Karvy Wealth.
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