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Wednesday, September 10, 2008


GSEs to aggregate on treasury's balance sheet

per housing wire -- the congressional budget office (CBO) has determined, to the apparent surprise of the bush administration, that the FNM/FRE complex should not be held off the government balance sheet now that they've been bailed out.

“It is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget,” said Peter Orszag, CBO director, in a post on his own blog. “The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.”

per the ft:

The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, although public accounting rules mean that its tally of US government debt may not necessarily increase by $5,400bn.

of course the administration has been cooking the books for years, running minor items such as the wars in iraq and afghanistan off-balance-sheet. perhaps they presumed they could get away with as much here as well. and i frankly wouldn't be surprised to see them ignore CBO; debt markets won't, however, abide the wishful fantasies of predatory politicians.

again it remains to be seen how the treasury market will react to the nationalization of the GSEs. if the result is a growing crisis of confidence in the ability of treasury to make investors whole -- the beginnings of which are already exemplified in sovereign credit rating reviews -- and treasuries fall with yields rising in response -- the effect could quickly destroy any perceived benefit of the bailout.

UPDATE: nothing's shocking.

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