Republished Article from Mish’s Global Economic Trend Analysis.

Former Fed Governor Says “Fannie, Freddie Insolvent”

In case you were wondering about Record Spreads On Fannie Mae, wonder no more. Former Fed Governor Poole says Fannie Mae, Freddie Losses Makes Them ‘Insolvent’

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae’s assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole, 71, who left the Fed in March, said in an interview.

“At some point we’re going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,” Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television. “We’re getting to that point where a decision has to be made by Washington.”

Poole is “a long-time critic,” said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac.

“Freddie Mac is doing exactly what Congress intended when it chartered the company and, more recently, when it passed the Economic Stimulus Act,” McHale said. “We are well capitalized and positioned to continue to serve our vital housing mission.”

While leading the St. Louis Fed, Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and said the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters.

I really liked the post on Barry Ritholtz’s blog The Big Picture , so hopefully he doesn’t mind that I republish it

BRIC vs PIGS
Posted by Barry Ritholtz on Wednesday, July 09, 2008 | 09:15 AM

I was at a lunch recently with about 10 people. One of the participants was an analyst from Portugal — smart guy, delightful accent.

The table was discussing the BRIC countries — what a tiresome acronym THAT has become — and our Portuguese pal mentioned the PIGS countries.

PIGS? What the heck is a PIGS?

It turns out that PIGS stands for Portugal, Italy, Greece & Spain — P.I.G.S.

Why so crude an acronym? They are all in, or on the verge of tumbling into, a recession. Their significance is that they are the soft white underbelly of Europe. While not as economically important as Germany or England or even France, they are still a substantial chunk of nations, consumption and output for Europe. Our dashing Portuguese analyst expects their slowdown to spread to the rest of Europe.

PIGS: Now you know.

UPDATE: July 9, 2008 11:09AM

I am aware of the dispute between whether Italy or Ireland is part of the PIGS. I am going to defer to the Economist magazine, which notes:

One danger is that fractures within the euro area will distract the ECB from staying on top of inflation. A particular worry is what could be called the PIGS—Portugal, Italy, Greece and Spain, Europe’s negative version of the fast-growing BRICs. The fear is that these countries may be in a hole they cannot easily climb out of and that the ECB will be pressed into running a looser monetary policy to save them.

 Click here for an map of europe.