Monday, July 14, 2008

Fannie Mae and Freddie Mac - the guarantee always expected

The Treasury announced that it would support Fannie Mae and Freddie Mac through a direct lending facility at the primary credit rate collateralized by government and agency securities. The Treasury is also asking Congressional approval for increased line of credit. These changes do not change the status of these GSE's but provides what was always expected a backstop guarantee from the government.

Nevertheless, there is a level of irony with these actions. These GSE's never got involved in the sub-prime mess. They never engaged in holding the exotic mortgages, so they were never the direct cause of the problem. In fact, they were backing off from the market, but the fall in the housing bubble is having a huge secondary effect on their financing and their ability to maintain their current leverage given an eroding capital base. Their stocks have been decimated. They financing is now in shambles and the taxpayer is left holding the bag. A private entity which generated profits for shareholders is now having the government bear the social costs of their leverage practices. Agency spreads have not widened on this news because the market already believed that this was a likely scenario.

The housing fall-out continues and will have the ramification of increasing the overall cost of the housing debacle while eroding the confidence of investors in the US fixed income market. Even with borrowing lines, the ability of these entities as GSE's to follow business as normal activities will be curtailed.

1 comment:

Ev said...

Hi Mark,
We met a few years ago at the Hedge Fund Industry Awards. I'd like to speak with you about a few issues, capital for your hedge fund, a book I'm writing, etc. Feel free to email me with your email at evnucci@nucciconsultinggroup.com. Best wishes.