No Senior Debt Guarantee For Fannie and Freddie?
The Rescue Hound That Didnt Bark

Posted by John Carney, Sep 07, 2008, 5:49pm

Not only did the Treasury Department avoid a direct capital injection into Fannie Mae and Freddie Mac, it has also avoided making an explicit guarantee of the senior debt of the two mortgage companies. Many people expected that the government would explicitly back the senior debt issued by the two companies.

Instead of a direct promise to support the debt with the full faith and credit of the United States, the government has pledged to maintain a positive net worth at the companies, buy mortgage backed securities from them, continue meeting their business obligations, and provide a huge line of credit. The promise to maintain a positive net worth at the companies means that they will be able to maintain debt payments, and so it amounts to a back door promise on the debt. But nowhere has the government made a direct pledge to the bondholders. It's still an implicit, "in effect" guarantee.

"I think that the stunner of what Paulson said this morning was not about the equity haircuts, but that they didn't explicitly guarantee the GSE debt," one DealBreaker reader writes. "This suggest that the fear of a flight from Treasuries and a consequent dollar run is real."

2Recommend this! 8Comments

Tags: Fannie Mae, Freddie Mac, Mortgage Rescue, Treasury Deparment

Comments

1

Posted by guest, Sep 07, 2008 6:51PM

Who wrote that comment? It's fairly accurate IMO. A lot of foreign countries have their hands in FRE and FNM's cookie jars, I don't think they'd be very pleased by this maneuver... Paulson and Bernanke need to be tried for treason in federal court, at the very least designated as enemy combatants and sent to gitmo...


-HEDGEmony

2

Posted by guest, Sep 07, 2008 7:02PM

and S&P futures are up 2%! All of the accounting gimmicks should be well known by Tsy. Tax Deferred Assets and "temporary loss on securities" that total around $56 billion. And then of course there's Freddie's reserve policy where they wait for a loan to be delinquent 2yrs before reserving against.

Paulson did a complete about face from his position mid-week. I don't think it's the asian central banks either. Paulson must finally see that the losses Freddie and Fannie are going to take on their prime and not-so-prime books is going be catastrophic and it isn't going to wait until 2009 to get here.
The market should be crapping its pants.

3

Posted by maymardgkeynes, Sep 07, 2008 7:09PM

"The promise to maintain a positive net worth at the companies means that they will be able to maintain debt payments, and so it amounts to a back door promise on the debt."

Not quite. While it is true that it means that the the GSEs will be able to maintain debt payments, under American law the ability to make payments in no way creates a legally enforceable right to demand payment. It just doesn't. Thus, this is most decidedly not a promise, backdoor or otherwise, to back the GSE debt with full faith and credit. Paulson's dissimulation might be enough to make Bill Gross smile (see Bloomberg), but it won't fool the Chinese or the Russians for an instant. I have to ask, what were these people at Treasury thinking? This does nothing.

4

Posted by John Carney, Sep 07, 2008 7:19PM

@3:

I totally agree. I've added the following to make that clear. "But nowhere has the government made a direct pledge to the bondholders. It's still an implicit, "in effect" guarantee."

It's interesting that the government's deal is still with the companies themselves and doesn't reach out directly to holders of the debt.

5

Posted by guest, Sep 07, 2008 8:52PM

the GSES are now being run and financed by the US gov't...if the MBS guarantees aren't upheld by them, we've got bigger problems because that will mean the gov't had to make a choice between paying that or Treasuries, and that would mean we are in quite a pickle.

6

Posted by guest, Sep 07, 2008 11:02PM

Default or hyperinflation, take your pick. There's simply no other way all these debts can be repaid.

7

Posted by guest, Sep 08, 2008 9:32AM

"This suggest that the fear of a flight from Treasuries and a consequent dollar run is real."

or, more likely, it suggests that they are conducting a necessary but undesirable activity with as much restraint as possible under the circumstances, like the experienced, pragmatic individuals they are.

Put your tin foil hats away.

8

Posted by guest, Sep 08, 2008 9:33AM

and, every tom, harry, and big swinging Dick who's short the dollar would sell his children for a "dollar run" right now.

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