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ECONOMIC ANALYSIS: Fallout from government takeovers likely to be modest

September 15, 2008

It is hard to know what to think about the U.S. Treasury's takeover of mortgage lending giants Fannie Mae and Freddie Mac. Other than the imminent demise of such charming company nicknames, what will this mean to workers, investors, creditors, mortgage holders and taxpayers?

If you are trying to obtain a new mortgage, the bailout (if that's the right word) should result in modestly lower borrowing costs.

If you are an investor (and that mostly means larger banks and a few remaining retirement accounts held in mutual funds), well, you have lost big time. Notice the use of past tense. The value of these investor stocks was already in the Chuck E. Cheese ticket value range. Now, the stocks will not rebound.

If you have lent either company money (and that is primarily the People's Bank of China, their version of our Federal Reserve Bank), you should recoup most of your loan. So who loses?

Most of the workers at both firms are still employed. I doubt that will last long. Sometime, probably early in 2009, it is likely both companies will be split and sold to other financial services firms.

Some workers will be taken along, others will be redundant, and any prediction on who and when these jobs will change is premature. If you are top management of either firm, you will enjoy a golden parachute. But you better hope the books are perfect. Squadrons of forensic accountants are beginning their work at putting you in jail, and many in Congress will be all too happy to air their findings.

Taxpayers may or may not lose. Congress has authorized perhaps $200 billion in support. This may be nothing more than a short-term loan that will be recouped when the companies are later sold. Or it may be a complete loss. I suspect the actual outcome lies somewhere between the two extremes, but it is too early to tell.

Some taxpayers will benefit as mortgage loan costs drop (or at least do not rise). Also, the very positive reaction from financial markets worldwide at least adds some value to suffering retirement accounts and stock portfolios. In the end, the negatives will make little difference to the federal budget.

The sad truth is that it has long been known that the U.S. taxpayer would protect these companies from failure. After all, they were created by the U.S. government, not investors. There is much speculation that this step marks the end of a lengthy worldwide march toward free markets. I strongly doubt this marks a turning point. I imagine we will get it right this time.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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