Finally A Straight Evaluation of Fannie Mae and Freddie Mac

Wiiliam Poole, a former Fed Governor (one of the people that makes up the Federal Open Market Committee) came out tonight and said what so many of us are thinking: Fannie Mae (FNM) and Freddie Mac (FRE) are bankrupt if you use the same accounting principles to which we hold every other company.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in an interview.

Fair value accounting measures a company's net worth if it had to liquidate all of its assets to repay liabilities. Fannie Mae and Freddie Mac, both of whom have the implicit backing of the government, make money by borrowing in the bond market and reinvesting the proceeds in higher-yielding mortgages and securities backed by home loans.

Not good. These two firms should be left to fail, but there isn't a politician in American who has the balls or the common sense to do it. But they will fail, and fail spectacularly, and when they do you and I will get stuck with the tab to bail them out.

``At some point we're going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,'' Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television. ``We're getting to that point where a decision has to be made by Washington.''

While leading the St. Louis Fed, Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and said the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters.

The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said.

``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''

So the good news is that, ultimately, Freddie and Fannie will have succeeded in their goal of "promoting home ownership for all Americans". The only bad part is this "ownership" will consist of every American footing a portion of the bailout bill that will come at our expense, which, frankly, I do not believe was the original goal when these companies were chartered by the government.

Normally I would demand dinner and drinks before I get screwed like this but somehow I get the feeling that request may fall on deaf ears.