Sunday, 7 September 2008
$1 trillion bail-out; Badger cheers!
Robert Peston's reaction to the news that the US government is to bail out mortgage companies Fannie Mae and Freddie Mac by saying that our little problems with Northern Rock pale by comparison.
For all the detail and comment you could want on this story see Barry's blog here.
Sadly the NR comparison is not quite true. NR never had oblique Government guarantees, NR has a worse looking portfolio of loans than either of these two companies. The US estimate is that if 10% of mortgages for bad then the US taxpayer could be $100 billion in the hole. However, we have already 'invested' £3 billion in NR and if 10% of the £40 billion loans go bad then we are on the hook for £7 billion loss. Our economy is 10x smaller than the US and we also have a current exchange rate of $1.75 to the pound.
Therefore US losses estimated at $100 billion / 10 (economic capacity) x exchange rate 1.75 = £5.7 billion.
Northern Rock losses estimated at £7 billion.
Great performance by our Chancellor eh?
My two cents: the markets may rise but this bail out surely will cause foreign investors to think twice about the US. The Dollar rally may continue for a bit, but it seems that the US has decided to inflate its way out of the credit crunch for sure this time.