Now back to the context of our discussion. We are witnessing the collapse of major financial houses, i.e. Bear Stearns, Fannie/Freddy Mae/Mac, Lehman Brothers and we expect some other major players shortly. So far the US government bailout is the Mother of all bailouts. The taxpayer cost for just two major mortgage companies — up to $200 billion — is more than the total cost of bailing out thousands of S&Ls in the 1970s.
In short, the federal government is buying a pig in a poke — a bottomless pit that will suck up many times more capital than they're revealing. Let's look at the numbers:
Mortgages owned or guaranteed by Fannie and Freddie: $5.3 trillion.
Treasury securities outstanding as of March 31, according to the Fed's Flow of Funds (report page 87, pdf page 95): Also $5.3 trillion.
Here's the dilemma - what if foreign investors and all those who hold government bonds and securities decide to dump them? To add insult to injury according to Dr. Martin D. Weiss it is actually worse than that, for if foreign investors, who are most likely to dump their holdings if they lose confidence in the United States, hold an estimated 20% of the Fannie- and Freddie-backed mortgages outstanding - but also these said foreign investors who own 52.7% of the Treasury securities outstanding (excluding those held by the Fed) decide to make a clean break because of the bankrupt nature of these institutions - could you imagine the fallout?
So based on the above stats, Treasury securities are actually more vulnerable to foreign selling than Fannie and Freddie bonds. An ominous scenario for most American families - notwithstanding the global impact this would cause as a ripple effect.
The safety of every stock, mutual fund and ETF you own now hangs in the balance ... This great credit crisis is rapidly spreading beyond banks ... beyond brokers ... beyond the entire financial sector ... to many of the most widely held non-financial stocks in America and internationally!!! The crisis could easily move from plague to pandemic according to Dr. Weiss.
The U.S government saw this coming and did nothing to avert it. The question is - can we trust our government with our financial affairs or are we going to look back a decade from now to realize we didn't learn anything from the S&L fiasco of the 70's and we simply sat and watch the government and the captains of industry cock-up our investments and life savings in another Herculean heist of Titanic proportions?
The choice is ours!!! May God help us…