Point of Note

Secretary Paulson has spent the better half of this week in front of congress pushing forward his plan to bail out the GSE's. After watching plenty of his testimony in adamant defense of a federal blank check to back Fannie and Freddie I would just like to point out a few disturbing facts about those two organizations.

Fannie's ratio of leverage to equity is roughly 70 to 1 whereas Bear Stearns at its worst was less than 50. With that kind of leverage one can only imagine how far underwater the loan portfolios of the companies could be.

The GSE's are responsible for 80% of new mortgages in the past 6 months and 50% of all outstanding home loans in the United States. It is concerning to think of the potential ramifications if either GSE goes bankrupt or were to stop writing new business.

The government implicitly (may soon be explicitly) backs all Fannie and Freddie debt, which totals around 5 Trillion dollars. Just to put that in perspective in 200+ years as a nation we have racked up 9 Trillion in national debt and now the tax payers of today and the future will be on the hook for what will most likely be the most rapid accumulation of debt in the history of the world.

When looking at past great empires it is easy to notice a common thread in their demise, reckless imperialism financed by national debt. Now I am no forecaster but I will say that I hope the next president puts the elimination of those two at the top of his list.