The bailout of Fannie Mae and Freddie Max continue to raise questions.
The US government's plan to rescue Fannie Mae and Freddie Mac got the initial tick. The big investors supported a $US3 billion short term debt issue from Freddie Mac. But then things turned pear-shaped. Investors, worried about financial groups, especially US commercial banks, have sent bank shares tumbling way down. Some good details from MarketWatch.
But the questions remain. The Financial Times makes the excellent point: what are the long-term prospects for these GSEs? Is the US Government approach like sticking a band-aid on a machine gun?
"The current structure for Fannie and Freddie is unsustainable. The GSEs are poorly regulated. They have given successive US governments an incentive to keep the housing market inflated. They socialise their risks and privatise their profits. Having saved the GSEs this weekend, policymakers should aim to bring about a decent burial for Freddie and Fannie."
The FT suggests breaking them up into smaller pieces and selling them. But the question is who would buy them?
And Lawrence Kudlow of the New York Sun says it creates a moral hazard.
The bailout of Fannie Mae and Freddie Mac, combined with the failure of IndyMac and questions about the health of the rest of the banking system tell us one thing: when the US financial system needs to be propped up by the Government, we are in serious trouble.