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June 5, 2004 Pundits who follow the Fed are predicting that June will be the beginning of several rate hikes the Fed, under Chairman Alan Greenspan, will put in place over the coming couple of years. Many mutual fund advisors and stock analysts agree with that viewpoint and place high odds on the starting point in June. However, ignored in the viewpoint of the majority is the impact rising interest rates will have on Fannie Mae and Freddie Mac, the house-finance loaning giants. The Fed is undoubtedly aware of the impact that a sharp and sustain escalation in interest rates would have on Fannie and Freddie. The Wall Street Journal’s Opinion section (June 4) had a very interesting article by Susan Lee on the possible effects that increased interest rates will have on this pair of loaning behemoths. The conclusion that Ms. Lee draws is “one spectacular crisis.” The two funds are in fact leveraged hedge funds (which she acutely notes as “pretending to be housing-finance companies”) and the last time a big hedge fund got into trouble was when Long Term Capital blew up, with major consequences. That has to be on Greenspan’s mind, as well as other members of the Federal Reserve Board. One of the primary problems with Fannie Mae and Freddie Mac is that they borrow short and lend long. In an environment where interest rates reverse and start to climb, that creates a problem. The problem is magnified by the size of Fannie Mae and Freddie Mac. Consider this – Fannie Mae and Freddie Mac rollover $30 billion in maturing obligations each week. Each week! Lee points out that Fannie Mae and Freddie Mac have more than a third of their total assets maturing in one year. If interest rates are sharply higher, the pain at Fannie Mae and Freddie Mac will be palpable. The one huge concern is liquidity. If there is a ‘run on the bank’ Lee states that Fannie Mae and Freddie Mac obligations would be illiquid in a matter of a few days. Here is what could be considered the most frightening fact – the combined securities of Fannie Mae and Freddie Mac are larger than the debt of the federal government. The debt is also widely held, so the pain would run wide. Lee sums up by stating that Fannie Mae and Freddie Mac have ‘just the right mix of the big and dangerous to generate one spectacular crisis.” The Fed is aware of this potential issue (Greenspan mentioned it some time ago) and must have a wary eye on Fannie Mae and Freddie Mac. I would suggest that this is one primary reason the Fed won’t be in a big rush to push interest rates upward in the coming year. Sure, they may rise some, but the Fed will really keep their foot on the brakes in trying to help Fannie Mae and Freddie Mac negotiate their way around the interest rate turn. Fannie Mae and Freddie Mac may be the one reason that interest rates have remained so low for the past few months when many have thought the Fed would pull the trigger and get the increase started. The Fed will be in no rush over the coming year to pump up interest rates and any rise should be slow and moderate in the coming year (outside of unexpected strong and compelling reasons to the contrary). So don’t think that a rush to higher interest rates is inevitable, or that when it does occur, it will be long and strong. A moderate, creeping approach, with a lot of pauses along the way, is more likely to be what occurs. ------------ About the author: Dwayne Hines currently has 12 books selling in major bookstores and writes for major magazines such as Physical and FitnessRX. Email Dwayne Hines: dhines@3dinet.com Tell a friend about this site! ------------ |
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