Market Lukewarm to Fannie and Freddie Takeover

The stock markets of the world rallied today on the Fannie and Freddie takeover. However, the market is still uncertain about the consequences and there were sell-offs in some key shares. The chart below shows the action in S&P 500, S&P/TSX 60, gold, oil, Fannie Mae, Freddie Mac, bond insurers, and mortgage insurers.



The weakness in the mortgage insurers is surprising to me. I was thinking that a bailout would help the mortgage insurers but the market doesn't seem to share that view.

This could turn out to be a colossal disaster for the US government (former FedRes governor, William Poole, expects a potential $300 billion liability for the government)... or it could be a great move. We really won't know for several years. There is room for the government to actually end up making a profit if things work out. All I can say is that the government had few options. I personally would have waited and seen if the GSEs can earn their way out of this mess but the government chose a quicker resolution.

We are witnessing history in the making. Fannie and Freddie shareholders, along with taxpayers, are being slaughtered to alleviate the housing collapse.

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