The big financial news this week is the sharply increased doubts about the stability of Fannie Mae and Freddie Mac, the big government-sponsored mortgage companies. But as talk of nationalization increases and their stocks continue to plummet, it’s important to try to figure out what a failure of one or the other would actually mean to markets and to taxpayers.
That issue has only begun to be explored in the press. Fortune this week looked at that question, calling it a “doomsday scenario” that would result in “chaos.”
“If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns,” says Sean Egan, head of credit ratings firm Egan Jones. “It could throw the economy into depression or something close to it.”
The consensus in the media is that the government won’t let them fail, something markets have long assumed and governments of both parties have long denied. But if the government thought Bear Stearns was too big to fail, it certainly thinks that of Fannie and Freddie, which own or back some $5 trillion in mortgage debt. Fortune quotes a Standard & Poor’s report that says it could cost the government more than a trillion dollars. Uh huh. Trillion with a “t”. But the magazine doesn’t give us any more information about how that would happen.
The Wall Street Journal and New York Times have steered clear of looking at the worst-case scenario. The Journal on page one today focuses on the companies’ role in the housing market, noting that “Their ability to provide money for mortgages is vital to the government’s efforts to shore up the slumping U.S. housing market.”
The Times notes today that if the U.S. takes on responsibility for the companies, it could raise the borrowing costs for the entire government since it would add $5 trillion to the $9 trillion national debt. It doesn’t attempt to quantify what that would cost taxpayers, though. Fortune says the S&P report said a government bailout could force it to downgrade the U.S. credit rating, though the Journal says today that’s unlikely.
How likely is a bailout to happen? Hard to tell from the press coverage, though some have noted as The Washington Post does today on A1 that Freddie Mac is already technically insolvent. It’s worth a negative $5.2 billion if it prices its mortgage assets at current values. The Post notes that a stumble by either company would send mortgage rates rising and cause banks to cut back on lending. And markets certainly seem to be betting on a government bailout. By sending shares down so sharply, they’re saying existing shareholders are likely to lose their money.
We expect the press to pursue the obvious question of what taxpayers’ ultimate exposure might be in a range of scenarios. We’d also suggest the press take a step back to remind readers, and itself, how unprecedented all this is—how quickly what once were “unthinkable” scenarios are becoming front-page news.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.