Fannie Mae and Freddie Mac, the former mortgage giants shamefully taken into conservatorship by the government, have now suffered another indignity. They were both delisted from the New York and Chicago stock exchanges.

Ouch!

The NYSE said they asked them to be removed due to low share prices, but they both have had low share prices since the day they became 80% owned by the government.

So why now?

I wish I knew. Maybe their friends on Wall Street are helping the Republicans shine a light on the massive bailout of the GSEs. In any case, it does foreshadow worse days ahead for the two companies.

Fannie Mae & Freddie Mac Delisted

Not so if you believe Fannie Mae and Freddie Mac’s press releases. Click the links to read them.

Both are upbeat saying the companies’ stock with still be available on “over-the-counter market and quoted on OTC Bulletin Board (OTCBB)…”.

The filing with the SEC and delisting will go into effect on June 28th, 2010.

I know the Obama administration was fighting to return the GSE’s to their former place as “top dog” in the mortgage securitization arena. This could certainly put a monkey wrench in those plans.

Of course, I could be wrong.

GSE Bailout Massive But Necessary

After the government covers all the losses of these two companies, the US taxpayer could have possilby blown $1 trillion according to Bloomberg:

“Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said that a 20 percent loss on the companies’ loans and guarantees, along the lines of other large market players such as Countrywide Financial Corp., now owned by Bank of America Corp., could cause even more damage.

“One trillion dollars is a reasonable worst-case scenario for the companies,” said Egan,…”

The government estimates of the cost is a lot less than Mr. Egan’s. In the same article we get their estimates of the GSE’s bailout:

“The Congressional Budget Office calculated in August 2009 that the companies would need $389 billion in federal subsidies through 2019, based on assumptions about delinquency rates of loans in their securities pools. The White House’s Office of Management and Budget estimated in February that aid could total as little as $160 billion if the economy strengthens.”

So who is right…the CBO at roughly $400 Billion, the OBM at $160 Billion, or Mr. Egan at $1,000 Billion?

Well it all depends on the housing market.

If we are at the bottom of home price drops, I’d pick the CBO’s number. If we get another 10-20% drop in housing across the board, I’d go with Mr. Egan’s number.

I doubt the housing market will drop that much so I’m going to pick a number in the middle…say $800 Billion will be the final tally for the GSE’s bailout.

But either way, the bailouts of Fannie Mae and Freddie Mac will end up being more costly than any of the preceding bailouts of insurance companies, banks, or car companies.

The truly sad reality is the answer to this question…

Didn’t the government have to bailout the GSE’s since their debt had an implicit government guarantee?

Yes. Investors all over the world, including central bankers, would assume their bond holding would be the next thing we’d default on if we defaulted on our “implicitly guaranteed” mortgage-backed securities.

Disasterous…Catastrophic…Ruinous are all the adjectives that come to mind if that were to happen.

Investors in car companies, insurance companies, and banks were never given an implicit government guarantee and they got a bailout. It only makes sense that the GSEs WITH a government guarantee would get one also.

It also makes sense that companies that have the backing of the Federal government will take more risks than those without. And a company taking greater risks once things go south in a big way will have bigger losses. Hence, a bigger bailout is needed for those companies.

My point is this shouldn’t be a surprise to anyone.

I wrote about first in May of 2008 in an article called “Fannie Mae & Freddie Mac On The Brink of Collapse”.

The bailout of the GSEs is the “forgotten bailout” and I don’t think we had a choice but to do it. But once we get the final bill, I hope our representatives in the government have the intelligence, courage, and hindsight to never give an “implicit guarantee” to any publicly traded company again.

I’m not holding by breath!

Good Luck!

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