2008-07-12 12:10:57 - Markets around the world have the weekend getting to grips with another possible escalation of the sub-prime crisis. Monday should prove a volatile trading day, as there have been calls to bail out Fannie May and Freddie Mac, the two biggest housing loan companies.

Washington

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Meltdown looms when markets reopen on Monday as bail out calls get rejection by US think tank over $1.3 trillion of indebtedness.

Markets around the world have the weekend getting to grips with another possible escalation of the sub-prime crisis. Monday should prove a volatile trading day, as there have been calls to bail out Fannie May

and Freddie Mac, the two biggest housing loan companies.

Amid calls by some Wall Street investment bankers for a bailout of the GSEs Fannie Mae and Freddie Mac, FreedomWorks, a right-wing think tank in the US has urged lawmakers to clearly reject a taxpayer bailout and to remind investors that there is no government guarantee for the securities of these publicly traded corporations.

The US Federal Reserve will certainly be looking at the economic ramifications of what would be the largest financial lifeboat in history if the US governemnt has to bail out the two FM's. It also transpires that foreign governments are holders of most of the debt of these to giants of the US home loans industry. Fannie May has lost 90% of its share value in recent months.

FreedomWorks Matt Kibbe commented, 'The moral hazard created by the Federal Reserve's disastrous decision to bailout Bear Stearns is already coming home to roost.'

'There is no government guarantee for GSE bonds or GSE shareholders, and there should not be. There are about $5 trillion in outstanding GSE liabilities. As noted in the Wall Street Journal today, creating a retroactive government guarantee for Fannie Mae and Freddie Mac would immediately double the size of the publicly held national debt.'

'Investors holding agency paper already receive a significant risk premium over Treasuries. The prospectus for every GSE bond clearly states that it is not backed by the government. Taxpayers should not and will not bail out Freddie Mac and Fannie Mae from their poor lending decisions, lack of adequate reserves, and past accounting corruption.'

'Instead, Congress should act now to eliminate the GSE charter and send a clear reminder to the market that taxpayers will not be liable for GSE debt. The alternative could be a trillion dollar hit for taxpayers, according to an analysis by Standard & Poor's. Congress, in its failure to act in the past on GSE reform, helped create the current conditions at Fannie Mae and Freddie Mac, and now Congress must stop the rising risk to taxpayers and let these private companies to sink or swim in the market.'

'A bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics.'

As politicians call for taxpayer bailouts and a government takeover of troubled mortgage lenders Freddie Mac and Fannie Mae, FreedomWorks pointed out that a bailout is a transfer of possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent 'Report on Foreign Portfolio Holdings of U.S. Securities.'
(Balita Pinoy - Philippine News & Analysis)