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Federal Government Off-Balance Sheet Entities

posted by Adam Levitin

As attention in the mortgage crisis starts to focus on Fannie and Freddie, I think it's worth pointing out that they're basically the same problem as the SIVs--Fannie and Freddie are the federal government's off-balance sheet entities. They are the federal government's SIVs. And like the SIVs they got overleveraged, and the question is whether to pull them back on the balance sheet in some way or not.

Comments

Mortgage is the important part of the economy which is taken care by the finical department nut the crisis really affect it much

What an interesting observation! It is, essentially, an SIV, insofar as the taxpayer is concerned. Suppose we prop up Fannie and Freddie by providing the capitalization to cover anticipated defaults in their portfolio -- something akin to what we did with Bear Stearns. What's the price tag? We know that the "stuff" we would be backing is really bad stuff -- not like the "cover" we gave Bear Stearns, which was really cover for risk on derivative instruments that have a chance of being worth something long term (if I understand the deal correctly). So what would the cost be? 2% of 6 trillion? $120 billion? In Iraq dollars, that's only 10 months. Surely we can afford that, even if we have to borrow the money (same as we did for the Iraq war). Or does all that excess pressure on the national budget depress the value of the dollar? Help me out here, gurus.

That's not a very good idea. What happens if we pull the plug on Fannie and Freddie?
I'll tell you what happens - we will have another great depression. There won't be anyone getting credit for anything and as a result we'll see even more deleveraging, plunging consumer spending, double digit unemployment and stock market prices reaching multi-decade lows.
The government is doing a good thing by helping to save the financial system. By the way FNM and FRE are actually owned by private investors..

Of course Fannie and Freddie are owned by private investors. So are SIVs. But the implicit US govt. backing of Fannie and Freddie means that these are obligations of the US govt. that do not show up on the govt's own balance sheet. This is just like Citi and it's SIVs. And now Paulson has pulled the same move as Citi and essentially pulled them on balance sheet (or at least gotten the authorization to accomplish that end if necessary).

Pulling F&F onto the gov't balance sheets wouldn't itself cause a crash. Instead, it would be a way of preventing their collapse.

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