...and teach all Fed officials to do just that. Your ‘proactive’ revival might just work for sometime, but it isn’t enough to clean-off the mortgage mess! Right, Henry?!
So how serious is this twin-corp (Fannie & Freddie) issue? Imagine this – the duo control over $5.2 trillion worth of the US’ mortgage market; a thundering 43.3% of the total pie! Imagine them crashing!!! The Q1 FY 2008 net loss for Fannie Mae and Freddie Mac, pegged at $4.3 billion & $151 million respectively. So what’s the credit influx needed? As per Lehman Brothers, Fannie needs $46 billion while Freddie needs $29 billion! The eroding residential mortgage quality, alarmingly high debt-equity ratio (as high as 75 times!) and investor panic, all indicate that this downturn is likely to be prolonged & severe; and that companies would have greater capital needs as Mark Zandi, Chief Economist, Moody’s asserts, “Fannie and Freddie require some support from the Federal Government to shore up their liquidity positions...” The Fed has consistently been ‘reactive’ in its response to earlier crises but plans to swallow the ‘proactive’ pill this time with Henry Paulson on-board the Fed as it Chief Treasurer. However, the Fed should look for a more mid-term policy rather than adopting short-term strategies, which would only double its deficit and cause a further collapse of the dollar. Sadly, this intervention will only postpone the bottoming of the housing downturn and delay recovery. Worst, there will have to be many more outflows from Fed’s pockets, and at regular intervals. Watch out for this space!
So how serious is this twin-corp (Fannie & Freddie) issue? Imagine this – the duo control over $5.2 trillion worth of the US’ mortgage market; a thundering 43.3% of the total pie! Imagine them crashing!!! The Q1 FY 2008 net loss for Fannie Mae and Freddie Mac, pegged at $4.3 billion & $151 million respectively. So what’s the credit influx needed? As per Lehman Brothers, Fannie needs $46 billion while Freddie needs $29 billion! The eroding residential mortgage quality, alarmingly high debt-equity ratio (as high as 75 times!) and investor panic, all indicate that this downturn is likely to be prolonged & severe; and that companies would have greater capital needs as Mark Zandi, Chief Economist, Moody’s asserts, “Fannie and Freddie require some support from the Federal Government to shore up their liquidity positions...” The Fed has consistently been ‘reactive’ in its response to earlier crises but plans to swallow the ‘proactive’ pill this time with Henry Paulson on-board the Fed as it Chief Treasurer. However, the Fed should look for a more mid-term policy rather than adopting short-term strategies, which would only double its deficit and cause a further collapse of the dollar. Sadly, this intervention will only postpone the bottoming of the housing downturn and delay recovery. Worst, there will have to be many more outflows from Fed’s pockets, and at regular intervals. Watch out for this space!
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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