Plano Texas Bankruptcy Lawyer & Attorney : Sean McCaffity : Rochelle Hutcheson & McCullough Law Firm : Insolvency, Creditors Rights

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.

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My partner, Scott DeWolf, sent me this link the other day and I've been traveling and have not had time to stick it up on the blog.  It is an interesting news story (now a week old) picking up the comments of Joseph Stiglitz, a Columbia University professor and 2001 Nobel Laureate.  In the article, Stiglitz predicts that it is at least possible that the current economic downturn could be the worst the country has seen since the Great Depression.  As the article explains:

"[Stiglitz] explained that main cause of the current situation is historically unique -- and thus is befuddling those charged with creating solutions.

Other downturns were primarily caused by excesses in inventories or inflation; but this slowdown is due to the condition of "badly impaired" banks and financial entities, which are unwilling and/or unable to lend capital -- stymieing the very borrowers who usually drive the country back to vitality, Stiglitz said. And the Federal Reserve may have used up its ammunition -- and the faith investors and planners have put in it."

It is probably worth noting that the Fed cut interest rates yet again on April 30th.  (Making this blog entry somewhat timely).  That brings the federal funds rate to 2%.  Interestingly, the Federal Reserve also hinted that no further rate cuts would be forthcoming.  At least for now.  Perhaps a signal that the Fed has truly "used up its ammunition" or is running perilously close to being empty.

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Sallie Mae's chief executive announced today that the student lender would still retain some "core" profits in 2008, but that new loans would likely be made at a loss.  He also indicated that Sallie Mae had been predicting a crisis in the $85 billion student loan market for some time.

More evidence of the "subprime" crisis morphing over into other areas of the economy and prompting what many are now just simply referring to as "Credit Crisis."  Kevin LaCroix over at The D&O Diary has been noting the increasingly prevalent "credit crisis" lawsuits in the months following the initial wave of "subprime" mania for some time now.  It looks as if he is not alone in his assessment of the generally growing concern of a broad based credit crisis prompting numerous lawsuits in differing economic segments. 

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Fed Chairman Ben Bernanke said today that he thought a "recession is possible."

Really?  I could have sworn we were in a major boom.  I understand the Fed Chairman wanting to display confidence in the economy so as to not create even more skittish markets or prompt even further flagging consumer confidence, but at some point the reality of the economic situation and the rhetoric from the leader of U.S. monetary policy needs to match.  He's getting closer.

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I thought it would be interesting to look back a year or so and see what some leading U.S. economists thought of the subprime mortgage crisis back in early 2007. 

According to CNN, in March 2007, Federal Reserve Chairman Ben Bernanke told Congress that problems in the subprime mortage sector may not affect the overall economy.  Remarkably, he apparently said "At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." 

What is going on one year later?  Oh, nothing much.  Only $260 billion in short-term loans from the Federal Reserve to banks since December 2007.  And don't forget about the continual decline in interest rates in the first calendar quarter of 2008, in large part, to ward off a recession caused by the purportedly "contained" subprime mortgage crisis. 

Think Bernanke wants a "do over" on his prediction last year?

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