For some investors, and apparently for the media and for Congress, judging their coverage and comments, the looming failures of Fanny Mae and Freddy Mac were surprises. To other investors, however, the lid was simply pulled off a barrel of rotten apples.
For years, the head of Fanny Mae has bragged about lending money to low-income homeowners. Sounds great, right? Struggling Americans want to own homes just like everyone else, and along comes a White Knight with plenty of money to lend. And, you don’t have be all that qualified. Able to sign your name, fog a mirror? Viola! You have a home mortgage.
And, you couldn’t lose. The housing market was hot, up 17% to 20% annually in some areas, at higher rates in a few regions of the country. Why not buy? “If you can afford to rent, you can afford to buy,” said the posters in banks, which decided to get in on a good thing and also entered the mortgage business in a big way.
Fanny Mae and Freddy Mac, however, had the upper hand over banks. Fanny Mae and Freddy Mac are government sponsored enterprises (GSEs) and enjoy the implied backing the federal government. The implied government backing enabled them to borrow in the money markets at lower rates than other lending entities. That position resulted in Fanny Mae and Freddy Mac garnering 50% of the mortgage market in the US.
Under the laws that set up Fanny Mae and Freddy Mac, the federal government did not agree to back debt issued by the two lenders. Past Secretaries of the Treasury have said so. But, in the world of political expediency, Congress and the Fed stepped up to the plate.
So far, the U.S. government has not agreed to guarantee Fanny Mae and Freddy Mac debt. At this time, the Fed has announced that it will only buy Fanny Mae and Freddy Mac debt on the open market. That is a long way from guaranteeing the debt, but had the Fed not agreed to do make the purchases, Fanny Mae and Freddy Mac debt holders would have suffered huge losses.
As investors became aware that Fanny Mae and Freddy Mac did not have the capital to cover all the bad loans that they had written, Fanny Mae and Freddy Mac stock prices collapsed, losing about 85% in twelve months. Meanwhile, a large California mortgage lender, IndyMac Bank, was taken over by the FDIC, further spreading concerns about the banking industry.
Under such circumstances, gold and silver become of interest to an even larger number of people, and for good reason. Gold and silver are the ultimate monies. They cannot default; they need no government guarantee to maintain their values. Investing in gold and silver at this time makes sense.
A final note: Why was it that some investors knew to avoid Fanny Mae and Freddy Mac debt while huge financial institutions, such as insurance companies and mutual funds, got stuck? Primarily because those investors were attune to what was going on. Fact is, you cannot be attuned to what is “going on” by watching Establishment financial programs and by reading Establishment publications. You can learn what has happened by following Establishment sources, but it’s rare that you learn via Establishment media what is happening while it is happening.
One non-Establishment source is Weiss Research, founded by Martin Weiss, PhD, in 1971. Weiss’ understanding of banking and its inherent flaws, i.e., fractional reserve banking, gives him great insight into today’s financial markets. Visit his website at http://www.moneyandmarkets.com/. And, get more information about investing in gold and keeping up with silver prices on our website.
