What does bail Fannie/Freddie out do to our currency value?

I recently wrote a piece entitled The Tale of Two Markets, where I talked about the “Fannie Mae/Freddie Mac Experiment”. That experiment has now clearly failed and a bailout/privatization/nationalization of Fannie and Freddie is now being planned. While I have been expecting nationalization for quite a while, I am intrigued along with my peers and colleagues as to why the bailout is taking so long to accomplish. This is where it gets interesting and dangerous from a systemic point of view. My hunch is that the reason for the delay is that the Treasury Department is “peeling back the onion” on Fannie/Freddie and finding out just how much of a mess the two of them are in.

At last count, Freddie had Level 3 Assets of $151 billion while Fannie had $65 billion, for a not-so-paltry sum of $216 billion. When Freddie announced their results a couple of quarters back, they disclosed that most of their Level 3 Assets were of the “sub-prime” variety (the type of assets that started the whole Credit Crisis in the first place). They are also littered with Alt-A mortgages and are leveraged to the hilt.

Just how bad is the news at Fannie/Freddie? On Friday morning, Moody’s downgraded their outstanding preferred stock 5 notches from A1 to Baa3 (a slight gradation above junk) and their Bank Financial Strength Ratings (BSFR) to D+ from B- (one/half notch above D, which is reserved for companies in default). According to Moody’s, “the downgrade of the BFSR reflects Moody’s view that Fannie Mae and Freddie Mac’s financial flexibility to manage potential volatility in its mortgage risk exposures is constricted…..in particular, given recent market movement, Moody’s believe these companies currently have limited access to common and preferred equity capital at economically attractive terms.”
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2008/08/25/dead-men-walking.aspx
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Let’s say we bail them out and the tax payer is on the hook for all these bad loans and more that will come as prices drop more.

What does that do to our currency value? How do you cover all the losses and keep China and all the rest from being hurt since that is why this bailout is being done. It has nothing to do with our citizens. It is a bailout of other nations.

Jan

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