Update (9/10/08): Fannie and Freddie are, indeed, being nationalized (temporarily is how they’re spinning it). Apparently, their books did not contain an adequate capital cushion to meet their potential obligations. A grim day for taxpayers once again, but, probably, the right thing to do.
Just how bad has the housing crisis gotten? Shares of Fannie Mae and Freddie Mac are crashing as I type (look for short sellers to be blamed, to some degree justifiably). Freddie is currently trading right around $6 and Fannie at $9. For perspective, I owned Freddie in the fall and sold it then at $63. This precipitous drop has led to speculation that the government will place both (or maybe just Freddie) in conservatorship, which they are legally allowed to do.
This is an insane state of affairs. This blog has been trumpeting the coming economic apocalype since its inception, but I hope that the panic that is driving this sell-off subsides before they need to be bailed out. Although housing prices are cratering and foreclosures are way up, with more to come, this kind of panic selling is all out of proportion to the underlying value of Fannie and Freddie’s stock. They, indeed, may be liable for billions, but if people hang on (or buy at a bargain price now), the housing market will rebound. People will pay their mortgages. Fannie and Freddie will meet their debt obligations. The earth will continue to revolve around the sun.
Otherwise, once again, the taxpayers will be on the hook. This will not be good for Americans, America, or the world. Things are going to get worse before they get better. But don’t panic. Hold tight, work hard, and don’t take on debt you can’t afford. We’re getting close to the edge. Let’s not go over it.