"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.
Entry: No Senior Debt Guarantee For Fannie and Freddie?
The Rescue Hound That Didnt Bark
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.