Voltron says: According to the New York Times (article linked from my previous post) Fannie and Freddie were Phoney and Fraudy. What the government hired forensic auditors and bankers have uncovered so far is that they were keeping tax losses on their books as “assets” even though there was no reasonable expectation of taxable income to use them to offset in the near future and while most banks start writing off a mortgage if it’s 90 days late, F&F WAITED TWO YEARS! And they need to refinance $223 billion is short term debt in the next few weeks.
Here’s what we know: http://www.forbes.com/2008/09/07/fannie-freddie-bailout-biz-cx_lm_0907mortgage.html
Commercial Banks hold preferred stocks in F&F because the FDIC considers it as good as cash and there are tax advantages. It is unclear if the deferred dividend payments on the preferred stocks will send commercial banks into the arms of the undercapitalized FDIC (link). It is also unclear if it will trigger an apocalyptic chain reaction of credit default swaps (link) like what nearly brought down the financial system when Bear Stearns went under.
Here’s some indignation courtesy of the colorful Mr. Mortgage: http://mrmortgage.ml-implode.com/2008/09/07/fanniefreddie-massive-fraud-breakdown/