Friday, August 22, 2008

Yet Another Treasury Official Blabbers to the Press About Fannie and Freddie

Speculation continues to circulate about the future of Fannie and Freddie.  The general consensus seems to be that the government will inject equity into the GSE's in the form of some type of preferred shares.  According to a variety of "informed" sources the new equity would rank senior to the common, thus wiping out the existing equity holders and diluting the preferred shareholders.  If you read the Barron's article over the weekend, or the report in the Financial Times, you would be led to believe that "inside sources" confirmed this outcome.  However, Reuters has yet another "source familiar with Treasury thinking" who claims that "any effort by the Treasury Department to backstop Fannie Mae and Freddie Mac would seek to maintain the companies as shareholder-owned enterprises.  So, what's it gonna be?  I was gearing up for a big announcement from the Treasury over the weekend about its plans to deal with the GSE's.  But this new report makes me wonder if the Fed is just going to sit back and wait it out.  Concerns have been circulating about the $225 billion in debt that Fannie and Freddie has to roll over before September 30th.  Frankly, the Fed has already loaned Wall Street over $300 billion to help finance their mortgage and agency inventories, so what's another $225 billion?  The Fed owns over $479 billion in treasuries which it can sell and replace with agency paper and earn a much nicer spread.  Doing this would be completely insane, but frankly, it's no more crazy than the idea of fully nationalizing Fannie and Freddie.  What the Treasury actually decides to do is anyone's guess at this point.  One thing is for certain, if nothing happens over the weekend, investors should prepare themselves for yet another bumpy ride.   

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