08 - 9/9/08 US Takeover of Fannie Mae and Freddie Mac Home...

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9/9/08 US Takeover of Fannie Mae and Freddie Mac - Home Banks (provide mortgages for homes) Fannie Mae/Freddie Mac (Guaranteed bonds) Investors, banks, investors - Banks didn’t double check information for mortgages (liar mortgages) - If the house is worth less than the mortgage, it’s better to walk away and let the bank foreclose on it - If Fannie Mae/Freddie Mac fail, then the bonds are no longer guaranteed; this is bad for banks who have bought bonds and used them as assets; therefore assets lower and the entire accounting equation must be rebalanced - Winners o Basically rewarded for failing; works against the natural market that “gets rid of the weak” o Holders of mortgage-back securities guaranteed by the two companies o CEOs get severance pay - Losers o Taxpayers: each company has access to 100 billion in taxpayer money to cover losses; ultimate cost is unknown o Shareholders lose: stock down 90%; likely to be worth little or nothing now o Stockholders of Fannie Mae and Freddie Mac are left will little value
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08 - 9/9/08 US Takeover of Fannie Mae and Freddie Mac Home...

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