End of Illusions for GSEs
This is the single best piece I have read to date on Fannie Mae (FNM) and Freddie Mac (FRE) via the Economist:
"After a headlong plunge in the two firms’ share prices (see chart 1), Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.
The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press...
This model was based on the ability of investors to see through one illusion and boosted by their willingness to believe in another. The illusion that investors saw through was the official line that debt issued by Fannie and Freddie was not backed by the government. No one believed this. Investors felt that the government would not let Fannie and Freddie fail; they have just been proved right.
Oh, and it gets worse . . .
>
Source:
End of illusions
The Economist, Jul 17th 2008
http://www.economist.com/finance/displaystory.cfm?story_id=11751139
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Sunday, July 20, 2008 | 12:00 PM | Permalink
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Comments
Its a great read Barry. So, let me see here. America defaults on its debt, foreigners stop funding our debt and stop buying treasuries, they call in their holdings, treasury yields go to double digits, and the dollar dives into the crapper.
Fun stuff. Got gold?
Posted by: UrbanDigs | Jul 20, 2008 12:17:27 PM
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