It is simply unbelievable that lawmakers continue to shoot their own foot in their recent reaction to the sudden increase in the share prices of the common stocks of Freddie Mac and Fannie Mae.
Firstly, the lawmakers do not have any solutions of backstopping a 12 trillion dollar problem. It is not possible to solve it without private investors. They should be welcoming their participation and recapitalize Freddie and Fannie before even having an option of changing it to small private entities.
By threatening to wipe out common stock not only are they inviting potentially another property driven melt down but also not having any option to solve the 12 trillion dollar backstop problem.
Even if the government does decide to wipe out the common stock, there are going to be numerous lawsuits from community banks, for giving the wrong information just before the collapse, for making decisions to continue dishing out loans to stabilize the market, for directing how the two entities can continue operations since 2008.
The government clearly have their hands in all these decision as it would be nonsensical for the companies to take on more risks when the market was clearly tumbling. It will be totally impossible for the government to defend against these lawsuits.
It is easy for Buffet and others to suggesting closing down these entities but the government will be ultimately picking up the pieces. The privatization if ever possible for 12 trillion of risk management portfolio, will come at higher costs to everyone and at this point of time the market is still very weak in the recovery. This could trigger another correction in the real estate market and could keep the economy in a downward slide for at least 10 years. That is how long it took for the Asia bubbling bursting recovery.
Obama and Congress needs to come clean on the policy one way or another and should not sit on the fence. My strategic assessment is all permutations shows that the government have no option but to grow and stabilize the two entities even before they can consider privatizing the risks and the market. All other options point towards taxpayers being on the hook to even greater risk and uncetainty.
I sincerely hope that the government carries out a strategic permutations and use game theory to fully understand where they can steer market and essentially the economy. Until there is no stability in the housing market, they can be no sustainable recovery.
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