The former chairman of the Federal Deposit Insurance Corp. who played a key role in healing the U.S. banking system after the savings and loan crisis said Thursday he advocates a breakup of struggling mortgage buyers Fannie Mae and Freddie Mac.
Catastrophic Losses
There is a real danger that Fannie and Freddie could go under if they are unable to refinance their debt. As reported by The Wall Street Journal earlier this week, Fannie and Freddie have $225 billion of debt they need to roll over by the end of September. "This is when the market could effectively shut them down," Seidman warned.
Yet if the GSEs go down, it would be "catastrophic" because the mortgage securities are in most banking systems around the world.
"It could cause total panic in the global financial system, which is based on credit," he said.
"Some people say let them fail and let the market sort it out, and the market will sort it out," Seidman added. "But in the meantime that could mean the end of the market and the financial institutions and banks. They tried that during the Great Depression. The market will work, but it's a question of cost, and the cost would be the collapse of the banking system."
Since the U.S. financial system is based on credit, the government almost has no choice but to help any big financial institution in danger of failing, he said.
(Excerpted from WSJ Market Watch)
Catastrophic Losses
There is a real danger that Fannie and Freddie could go under if they are unable to refinance their debt. As reported by The Wall Street Journal earlier this week, Fannie and Freddie have $225 billion of debt they need to roll over by the end of September. "This is when the market could effectively shut them down," Seidman warned.
Yet if the GSEs go down, it would be "catastrophic" because the mortgage securities are in most banking systems around the world.
"It could cause total panic in the global financial system, which is based on credit," he said.
"Some people say let them fail and let the market sort it out, and the market will sort it out," Seidman added. "But in the meantime that could mean the end of the market and the financial institutions and banks. They tried that during the Great Depression. The market will work, but it's a question of cost, and the cost would be the collapse of the banking system."
Since the U.S. financial system is based on credit, the government almost has no choice but to help any big financial institution in danger of failing, he said.
(Excerpted from WSJ Market Watch)