Options for Fannie, Freddie May Include Liquidation

One option for overhauling Fannie Mae (FNM) and Freddie Mac (FRE) may include liquidating their assets, according to a  budget analysis for fiscal 2010 by the Office of Management and Budget [OMB].

From Bloomberg: The OMB also projected in its analysis…that the companies, which have received or requested $78.8 billion in aid since their federal takeover in September, will need at least $92.2 billion more. The Treasury Department doubled an emergency capital commitment for each company in February to $200 billion…

Alternatives range from “a gradual wind-down of their operations and liquidation of their assets,” to returning the two companies to their previous status as government-sponsored enterprises….

Fannie Mae and Freddie Mac may be nationalized, dissolved and broken up into several smaller companies, revamped as public utilities with the full faith and credit of the U.S. government or converted into insurers for covered bonds backed by U.S. mortgages, OMB said.

emphasis added

The ‘liquidation’ option is probably the least favorable scenario by fed regulators since the spillover effect will be a major economic destabilizer. At the same time, the possibility of both co.s becoming insolvent would leave the governemnt with no choice  but reallocate their assets to other institutions that can intermediate more effectively and hopefully without taxpayer guarantees.

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