– Thoughts on Strategy and Management

The worse is yet to come

Last we were informed about US government’s decision to rescue Freddie Mac and Fannie Mae. Both mortgage lenders are under special regulatory supervision now, the so called conservatorship. This event can be described in two sentences, but there are some major implications. We have found the following data that illustrate the size of this public rescue measure:

  • All CDS positions (CDS = credit default swaps) have to be cleared and processed. Their sum has been estimated about 1400 to 1600 billion USD. (The total market size is 62000 billion USD).
  • The total of mortgage based securities (e.g. mortgage backed securities) that have been issued from Freddie Mac and Fannie Mae counts for 5500 billion USD. This is nearly 50 % of the US market, which counts for 12000 billion USD.
  • The US government is ready to invest 200 billion USD in preferred shares. The sum of all public spending was 2700 billion USD in 2007.
  • The month the US government will spend 5 billion USD for bond issues of Freddie and Fannie.
  • Two month ago the Congressional Budget Office estimated the financial burden resulting to rescue Freddie Mac and Fannie Mae. The forecast was 25 billion USD.
  • Indeed the cost of this rescue measure will account for 300 billion USD (outcome of a new forecast). This amount would nearly twice the number in terms of US net raising of credit in 2007.

In sum it will be a very expensive rescue measure for the public budget. But alternatives – doing nothing – could be second best solutions, furthermore they bear the risks to become far more expansive due to avalanche impact chains.

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