What Will Happen to Fannie Mae?

How many mortgages along the Gulf Coast will be in default within the next few months? And how will those defaults affect Fannie Mae? Charles Mackay of The Wall Street Examiner has one suggested answer in a piece called, The Mississippi Bubble Company.

What will happen when Ben Bernanke in the White House, and Alan Greenspan at the Fed, realize that Fannie Mae (NYSE:FNM) is about to sink underwater in the wake of Katrina?

Fannie Mae is bankrupt. With perhaps hundreds of billions of dollars of mortgages literally and figuratively under water along the Gulf Coast, Fannie has unrealized losses that would stagger the imagination.

Perhaps this is why GWB has called a meeting with Alan Greenspan and his economic advisors. It will be "Weekend at Bernie’s" time at the White House today, as GWB leaves it up to Ben ‘The Printer’ Bernanke (Chief of the Council of Economic Advisors) and The Maestro (Alan Greenspan) on how to prop up Fannie’s corpse. I suspect they will hatch a plan for a new Mississippi Bubble company, maybe even distributing stock certificates by helicopter (an armored plated one, of course) over the Mississippi delta. Maybe it will then work something like this: The Bubble Company will pay Fannie for its mortgages, and then all will be well with Fannie. Then Fannie can continue its orderly liquidation, which has been ongoing since about last new year’s day.

My guess is that Mackay is too pessimistic about the narrow case of Fannie Mae but is on the mark in a broader perspective. Many mortgagors will receive considerable financial assistance from various levels of gubmnt. Indirectly, this assistance will be bailing out Fannie Mae at least as much as it bails out the residents.

At least that is what has happened in the past with Farm Aid. The aid merely allowed farmers to avoid bankruptcy, which in the end benefited the banks and other lenders at least as much as it benefited the farmers themselves.