Sunday, July 13, 2008

$15 billion for Fannie, and Freddie-As advertised!

The Times Online has the story:

The US Government was last night close to taking the dramatic step of pumping $15 billion into the country's mortgage system in a desperate measure to prevent the economy going into a tailspin.

The possibility of an emergency infusion of taxpayers' money - which sources cautioned had yet to be finalised - emerged ahead of a critical attempt by Freddie Mac, the mortgage group, to borrow $3 billion from Wall Street today.

Under the injection plan, the US Treasury would buy a total of about $15 billion of newly issued shares in Freddie Mac and Fannie Mae, the two giant mortgage groups that between them account for more than half of America's $12,000 billion of outstanding home loans.

Expectation of government intervention in the companies last Friday sent their shares plunging. Fannie's shares were down as much as 50 per cent and Freddie's 48 per cent at one stage. Fears of wider fallout from the mortgage market problems hit other financial groups, with Lehman's shares falling 20 per cent. The Dow Jones industrial average fell below the psychologically important 11,000 level for the first time since 2006.

Last night the US Securities and Exchange Commission (SEC) stepped in to issue a warning against rumour-mongering. The SEC said that it would check that no false information was being spread. It did not name companies it felt might be victimised.

I woke up early to visit some friends in rehab, so I suggested that the Fed's do this:

The Fed can't do nothing, but they cannot do what the market wants. The Fed in this case, can use their only option, which is to buy time. If the Bear Stearns paper that the Fed holds is worth every "penny" then the Fed can take some preferred of Fannie and Freddie.

Fannie's market cap is $10 billion, and Freddie's is $5 billion. So wipe out the shareholders again, and let the Fed take $15 billion of preferred to buy time, and teach your "moral lesson." Wall Street will buy it for a time, because the shareholder shorts will take the victory. And the banks, which own all their paper, will get a relief rally, that they hopefully will be able to lighten up into.

You can't put these "well capitalized" GSE's in a "conservator" status, because that would jack up interest rates, and then bondholders who have good paper will be treated differently than those who have the bad. And that the real "moral hazard" issue. What do we do with the paper that Citibank and JP Morgan hold? Protect it!

At least I got the story right before it happened. I hate to be labled "rumour mongering!"

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