March 10, 2004

Fannie Mae no longer backed by the G-Man?

John Snow, the US Treasury Secretary, has stated that the US Government no longer stands behind Fannie Mae and Freddie Mac. (1, below, 2, 3)

This takes me back to the late eighties, when the old Lady's Governor announced that the Bank of England would no longer necessarily bail out a bank just because it was a bank. Many years later, driving back after b-school, I heard Eddie George on the radio announcing the bankrupcy and immediate wind-up of Barings Bank.

Barings was old and venerable, but tiny. A ripple in the pond. Fannie Mae and Freddie Mac are ... none of that!

WASHINGTON (Reuters) - U.S. Treasury Secretary John Snow took direct aim Tuesday at mortgage finance firms Fannie Mae and Freddie Mac, repeating previous warnings to investors that government-sponsored enterprises are not financially backed by the U.S. government.

"We don't believe in a 'too big to fail' doctrine, but the reality is that the market treats the paper as if the government is backing it. We strongly resist that notion," he said in prepared remarks before a bankers group here.

"You know there is that perception. And it's not a healthy perception and we need to disabuse people of that perception. Investments in Fannie (FNM: Research, Estimates) and Freddie (FRE: Research, Estimates) are uninsured investments," he said.


Posted by iang at March 10, 2004 02:51 PM | TrackBack

I would normally think the same that Fannie Mae is too big to fail, so what's up with Snow's redundant remarks?


Posted by: bob at March 10, 2004 03:18 PM

It *is* too big to fail, no matter what John Snow says. But, it's in bad shape because they haven't been paying attention, riding on their implicit garauntee that's been there for so long...

For some reason, the administration has finally woken up to the problem, so they are now chiming in with warnings that the "investors will lose the lot." By warning the investors, they increase the cost of capital, and force the board to start looking at their balance sheet.

Posted by: Ian Grigg at March 10, 2004 03:31 PM