Frightening Freddie and Fannie Facts?
Freddie Mac reported a large loss yesterday, but it was a loss that was smaller than expected. Good news, right? Well, maybe not. Apparently, the losses were smaller than expected "because of accounting tactics that minimized the impact of bad loans."
But here is the more frightening quote from the article:
"Both these companies are clearly going to be insolvent by the end of the year, but everyone knows that Congress will do anything to keep them afloat, because if Fannie and Freddie go under, the entire global financial system will melt down," said Christopher Whalen, co-founder of the independent research firm Institutional Risk Analytics. "These companies' earnings don't matter. Their accounting hardly matters. People buy the stock because they believe the federal government will bail them both out if things get really bad."
(emphasis added).
Woah. Insolvent by the end of the year? Massive government bailout inevitable or a global financial collapse? Of course, that could just be pessimism run amok, but given the size of both Freddie Mac and Fannie Mae and the importance of those two giants to the housing market and the global economy, thinking of their collapse is a sobering thought.
For more on this, go visit Sox First, which is a good blog following management compliance issues and Sarbanes Oxley developments. Sox First has some additional links and articles about this issue.
