Saturday, July 12, 2008

Paulson to GSE's: Let the shareholders eat cake

As the crisis worsens for mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson is insisting that any potential government rescue plan not benefit the companies' shareholders, according to people familiar with the matter...

One option would have the government buy a chunk of Fannie and Freddie's preferred stock with terms that dilute the equity of common shareholders. The Federal Reserve could support Fannie Mae or Freddie Mac in a short-term funding crisis through its lending operations, which were extended to investment banks in March with the downfall of Bear Stearns Cos. A spokeswoman said Friday the Fed hasn't discussed that possibility with either company....

If a rescue becomes necessary, Mr. Paulson does not want to help the shareholders because of the "moral hazard" it would create -- desensitizing investors to risk because they believe the government will bail them out. It's a similar position he took during the government-orchestrated rescue of Bear Stearns by J.P. Morgan Chase & Co....

Wall Street could be exposed. David Trone, who follows financial stocks at Fox-Pitt, Kelton, estimated that Citigroup Inc. had $36 billion in mortgage securities backed by the companies and $15 billion in debt issued by them, and J.P. Morgan, $65 billion and $22 billion. Both companies declined to comment.

So Secretary Henry "nobody's home" Paulson's idea of strengthening Wall Street is to let shareholders of Fannie and Freddie Mac get nothing? That worked real well with Bear Streans, anyone else have an idea how well this will sell on Wall Street? Which is why the GSE's sell off every time Secretary Paulson opens his mouth. Thursday Paulson said they "were adequately capitalized. And the stocks got crushed. Friday, the same thing happened.

Why don't stockholders listen to Paulson? Why do shareholders listen to Meredith Whitney? Wall street listens to those who tell the truth, or aren't so daft that they can't see it. Paulson's in the latter camp-He could listen to Sister 7 and Nobody's Home and still not get a clue!

Men of peace are drawn and slain
Born to lead but die in vain
While the shallow carry on the money war

I’ve been wondering if you can see
I’ve been wondering if you can feel
There’s a fire and it’s in our home and we’re burnin? and burnin? we’re burnin? when you’re drinking your morning coffee
Do you feel the breath on your neck
If all the youth were at the white house knockin?
would you whisper nobody’s home

Anyone remember what Secretary Paulson said at the end of February?

It would be imprudent not to have contingency plans, but we are so far away from seeing something that would have me calling for a bailout that I don't see it.

I guess we're not so far away anymore.

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