Every bank in the country invests in agency paper. Even those that do not do so directly are exposed to it at second order, because they hold claims against other institutions that invest in agency paper. You don't have any bank account, unless your bank has assets to match its liability to you. And it has no assets, unless those it holds claims against, can pay it.
The entire capital of the US banking system is a little less than $1 trillion. That supports a money supply of $7.7 trillion. Agency paper is $5.3 trillion. Freeze the latter, even if eventually most of it can be realized, and there isn't a solvent bank in the country.
The ones running that risk are not restricted to some small class of investors in this or that stock. It is everyone who trusts a bank to pay them back. When you leave money at a bank, you are taking risks for the sake of a gain, too - the gain of a useful form of money, etc. And that is the risk under discussion.
What happens to the shareholders of Fannie and Freddie is a matter of complete indifference, in public policy terms. But failure of their *debts*, failure to meet *creditor* demands on them, means the money supply is gone and the backing system is gone and everyone you know is broke.
Which is what the Treasury, Fed, president, and congress, decided over the weekend not to let happen on Monday.
If they did nothing, it would happen, by Friday or so.
GM and Ford are likely to be next, incidentally. This isn't remotely over, and it isn't remotely about gains or losses to tiny groups of shareholders.
From my understanding, Fannie Mae merely acts as an insurance provider for loans, in exchange for a fee from banks.
If this is true, why can’t the insurance company go belly up and leave the banks with the loans each made on their own credit terms? Some banks will do great. Others will be found to have been too risky in their lending. Big deal. Good banks do great, bad banks do bad. The country goes on.
The entire capital of the US banking system is a little less than $1 trillion. That supports a money supply of $7.7 trillion. Agency paper is $5.3 trillion.[...]When you leave money at a bank, you are taking risks for the sake of a gain, too - the gain of a useful form of money, etc. And that is the risk under discussion.
IOW, a wholly irresponsible arrangement, resting upon the backs of the taxpayers, who are being called upon to provide guarantee for overleveraged assets.
This isn't remotely over, and it isn't remotely about gains or losses to tiny groups of shareholders.
Agreed.
And the lesson won't be learned, despite the fact that this is a harbinger of very painful times.