Depression I

Note: I forgot to push the publish button, and it’s kind of funny – ……
as I was perusing this article, Treasury set to bail out Fannie Mae, Freddie Mac, I couldn’t help but think of a few things.
“Ultimately, the government decided that Freddie and Fannie were too big to fail, and was unwilling to consider the damaging effects on the U.S. housing market and broader economy if the mortgage giants went down.”
money.

So, I thought, what would be the damage to the markets? It seems most agree there would be a domino effect if the two Big mF’s failed. My question is: what is failed? If their shares fell to zero? So they wouldn’t get credit from the private markets, i assume, since the markets would have nothing as collateral, the collateral being shares of the companies that own most of the homes in the US, albeit indirectly. And what would happen if they didn’t get credit from the private markets, in order to buy debts (mortgages from the private market)? Well, it seems to me that the fundamentals of it would be that they wouldn’t be buying anymore mortgages from banks, or at least significantly less. Then, if they bet bad and bought bad debt, their incoming revenue wouldn’t cover their costs to pay back the private sector credit markets, from which they borrowed, forcing them into default. Eventually, they would have to declare bankruptcy and the creditors would get their assets (those assets being mortgages). The creditors would have then on their hands mortgages, which they would want to collect on, since they’re not in the business of holding mortgages and servicing them (remember, they sell them, not make them). Of course, many of these would be bad (since they were bad for the Big mF’s), further reducing their ability to recoup their money, their shares tumble, they can’t get credit, etc., then down the line until it gets to the bank that actually originated the loan. That bank then hold the deed again, and if the loan was bad, it would have the house. If it did well lending, the loan will be paid off on schedule and it has nothing to worry about. If it wound up with more houses than paying customers, it would have to eat it profits, or at worse, sell at such a loss that it too would go into bankruptcy, in which case, those with cash under 200K would get paid by the FDIC.

So, that’s one possibility. Of course, how that could impact the larger economy is fairly severe, as well. Of course, the financial markets employ many people, who would them be unemployed. Further, the investors that have purchased shares would see their investments evaporate. I’m curious about the demographic of those investors. How much would be pension investments, how much would be corporate investment, how much would be individual investors? If most are institutional investors, not representing pensions, you could argue they can afford the losses, as that is their purpose – profit generation through risk. Like the guy in Vegas, if he wins, good, if he doesn’t, everyone agrees he was supposed to be playing with discretionary spending money, and not the rent