In a stunning reversal, Treasury Secretary Hank Paulson just said he will ask Congress to prop up faltering federal lenders Fannie Mae and Freddie Mac, both of which have lost more than 80% of their stock values in the last year as the subprime crisis has deepened, threatening pension funds and other institutional investors in the government-backed lenders.
The decision marks a reversal from Paulson’s comments Friday when he said the government supported the lenders “in their current form.” The companies have seen combined losses of more than $77 billion since the crisis began and the Federal Reserve today voted to open a facility for the lenders in case they need emergency lines of credit.
Together the companies own or guarantee half of the nation’s $12 trillion in mortgages. The moves also throw into question the fate of a $300 billion housing bill passed Friday afternoon by the Senate that Bush had threatened to veto.
What’s the outcome of all this? Besides Bush never again being able to brag about creating the highest rate of home-ownership in the world this could add as much as $5 trillion to the national debt and trash what little value is left of Fannie Mae and Freddie Mac’s stock. It’ll be interesting what new solutions candidates might have to offer on this, especially in a week where Obama is gearing up to go abroad.