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Sunday, September 07, 2008


treasury to intervene in GSEs

the rumors had hit the market late friday, driving up financial shares. the journal fleshed them out, and details have been leaking since. no official announcement yet, but as with bear stearns the announcement will come late sunday. it sounds as though preferred stock will be made money good, in an effort to bolster weak banks who hold scads of the stuff. (UPDATE: this is still in question!)

the new york times, without alleging fraud, reported that a government review of freddie found that the GSE had misleadingly overstated its capital condition. giant troubled corporation led by desperate predators pushing the envelope of ethics? surprise, surprise. hard to know if the revelation provided the excuse to intervene.

in truth the foreign central bank buyer's strike forced the hand of hank paulson and treasury. this was a move to restore some level of funding to FNM/FRE on the liability side and prevent a failed auction as they try to refund large amounts of debt in september.

the net effect from the possible alternative is an unmitigated positive. the bleats of the "free" market got louder this week, with bill gross more explicitly than ever -- as brilliantly related by kevin depew -- forecasting a debt deflation if treasury didn't open its balance sheet to the predations of the marketplace.

the net effect from the status quo, however? probably nil to negative, though it surely depends on the thinking of foreign central bankers.

there is a possibility that the FCB buyers strike was designed to push treasury to this intervention, and that flow to the GSEs will now resume as normal.

however, that may not be the case. it may also be that FCBs have simply decided not to fund the american housing market through the GSEs any longer. given the recent growing agitation overseas with american financial mismanagment, this seems more probable than before. in that case, treasury may end up taking on surprisingly large amounts of GSE debt in coming months as it finds itself paying out to FCBs who want cash as their instruments mature -- some to be used to stimulate home economies or bolster home currencies rather than to be reinvested in the united states. while paulson's "bazooka" mandate to fund the GSEs was unlimited by a flaccid congress, in reality the size of paulson's support needed to prop even downsized operations at the GSEs may shock treasury and the world.

will that force treasury rates higher -- even precipitate with time a run on the treasury?

of just as great importance -- jck at alea notes that "IF Fannie and Freddie are placed into a conservatorship, the party line is that CDS would be triggered." could the conservatorship of the GSEs unleash a flood and precipitate a systemic crisis in capital markets while trying to avoid one in the economy?

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hi gm. still enjoying your good posts. financial ninja coined a new phrase (for me anyway). the continuing "save the world from financial ruin" fed bailouts are... (drumroll please)... "taxpayer rape". works for me. are we scared yet? thanks.

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it's official. wasn't it just last week that citi was saying this couldn't happen? lol.

are we scared yet indeed, dc. the market reaction to all this will be interesting. sounds like a number of small banks will fail as preferred had their dividend eliminated along with the common.

and the key question -- if this is a credit event, do the CDS pay out? and what are the ramifications?

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importantly, this was in the press release:

Each GSE’s retained mortgage and mortgage backed securities portfolio shall not exceed $850
billion as of December 31, 2009, and shall decline by 10% per year until it reaches $250 billion.

believe it when i see it, but this means taking a massive support pillar out of housing over the next several years. sans subsidy, we could see housing languish for a decade.

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the key operation is that treasury will not only inject capital into both GSEs and the FHLB system as well -- it will buy FNM/FRE MBS on the open market to try to reduce spreads and make lending more "affordable".

the effect will be to remove bad mortgages from the GSE books and put them on treasury's. this is what the government did in the 1930s with the home owners loan corporation.

nouriel roubini is unimpressed.

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with european and asian stock futures soaring this morning sans "fed weekend bailout #6", here's a quote from Bertrand Russell which may say it all: "the trouble with the world is that the stupid are cocksure and the intelligent are full of doubt". what a mess. thanks, gm.

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