Investing guru Warren Buffett on an interview with The Wall Street Journal recently said that if the US housing market were to further worsen, the US government's intervention in the helping of Freddie and Fannie may loose a few hundred billion USD.
Buffett says that whether the results for the US government's intervention in bailing out Freddie and Fannie is good or bad will be based on the development of the US housing market. If housing prices continues to decline 15%-20%, the US government may loose a few hundred billion USD. However if the housing market is already near bottoming out, then the losses will be relatively smaller. When asked whether the US housing maket has reached a turning point, Buffett declined to comment on that.
The looser may not be only the US government. Citi's credit analyst says that the CDS for Freddie and Fannie and the banking industry has lost 25 billion USD. Because after the US government's bailout of Freddie and Fannie, they may be unable to repay in full the CDS. Citi's credit analyst also thinks that CDS by Freddie and Fannie circulating in the market is worth about up to 500 billion USD, investors may only be able to get back 95% of it.
After the US government's take over, notes issued by Freddie and Fannie are now in high demand by investors. Fannie Mae sold a record $7 billion of two-year notes to investors, signaling renewed confidence in the mortgage lender. The notes received more than $9 billion of orders, according to The Wall Street Journal. This is the largest single deal notes transaction in history. Fannie Mae placed 63 percent of the notes with US investors. A further 12 percent of the notes went to investors in Asia, 8 percent to buyers in Europe and 17 percent to others. Fund managers took the lead as the biggest buyers of the notes, taking 54 percent of the new securities, followed by 27 percent to central banks.
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