Fannie Mae and Freddie Mac on Wallstrip

That Was Then

I read lots of blogs. One of my favorite bloggers is Howard Lindzon, hedge fund manager, investor and founder of a cool site called Wallstrip. From their “About” page:

Wallstrip is where pop culture meets stock culture. Each day we take a look at a company whose stock is trading at or near an all-time high, and try to find the real world trend that explains why the stock is doing so well.

That said, they recently did a show on Fannie Mae and Freddie Mac. Julie, their world class reporter, presents an amusing but eerily sober assessment. She gives us a worst case scenario (which of course didn’t happen) to explain why the government would most likely step in and prop up the two companies. It’s a quick couple of minutes. Check it out…(blame CBS for the ironic choice of commercial)

Watch CBS Videos Online

This Is Now

As we know, the government did take steps to keep Freddie and Fannie afloat. In a scene played out in the weekend hours, reminiscent of a Bear Stearns bailout, the government implemented measures that would postpone the looming disaster.

And if you were paying attention to Julie, you should understand why they had to do it. Half of all our mortgages are backed by those two companies. More than 5 Trillion dollars of debt, spread around the world, attached in one way or another to mostly worthless CDOs. Even though Freddie and Fannie were both private companies, it was always expected they were somehow backed by the US government.

And when push came to shove, that perception became a sort of self-fulfilling prophecy. Our economy is dependent on foreign investments. Many of those countries are heavily invested in these worthless CDOs, and if our government allows a major player like Freddie or Fannie to go under, all hell will break loose.

And not just in the USA, either. The global economy right now is strung together like so many electric poles along the side of the road. Each individual piece is tied firmly to the others and if one falls, it will pull the others down with it.

I’m Jon, watching the lines sway with the wind.