So what’s going on between the Treasury Department and the GSEs? This morning Barron’s said that a government bailout of Fannie Mae and Freddie Mac was becoming more likely, in part because the mortgage giants were unlikely to be able to raise enough money in the open markets. The Treasury kinda-sorta put down the idea, saying it had “no plans” to use the authority lawmakers gave it to rescue Fannie and Freddie.
“As the secretary said many times before, we have no plans to use the authority that we’ve been given, so I’m not going to comment on any speculation,” Treasury resident hottie spokeswoman Jennifer Zuccarelli told a news briefing on Monday.
Those with memories that stretch back beyond the current crisis will recall that five days before Paulson was named Treasury Secretary, President George Bush responded to questions about the rumor resignation of John Snow, Paulson’s predecessor, by saying he knew of “no plans” for Snow to step down.
Of course, the Treasury’s denials are almost entirely besides the point. No one is asserting that the Treasury has current plans–like a schedule–to inject new capital or loans into Fannie and Freddie. Rather, Barron’s was analyzing the likelihood that the government will need to do so to keep them afloat. We suspect that the Fed was sending a subtle message that it didn’t necessary disagree with Barron’s by issuing this half denial.
Interestingly, speculation began to increase today that the Treasury may ultimately try to split apart Fannie. The idea would be to build a “Good Bank” of a securitizing Fannie that could continue as an independent entity borrowing at market costs without an implicit guarantee, and a “Bad Bank” loaded up with Fannie’s awful portfolio and ill-advised loan guarantees.

The special Federal Reserve borrowing facility for Wall Street securities firms is only temporary, a top Treasury official said Wednesday. Robert Steel, US Treasury undersecretary for domestic finance, stressed the word “temporary” in his remarks on the facility to the Wall Street Journal’s dealmaking conference on Wednesday.
The new discount window that allows securities firms to borrow from the Federal Reserve, a privilege reserved for depository commercial banks in normal times, was opened amidst the collapse of Bear Stearns. It has somewhat calmed fears that another large Wall Street firm could collapse in the fashion of Bear Stearns, but lately Fed officials seem to have been indicating that the window poses serious “moral hazard” threats.
Much of the discussion on Wall Street and in the media has centered around the likely regulation that would accompany any continuation of the window beyond September. Indeed, much of the coverage of Steel’s remarks concentrated on this issue. But this seems to overlook the very real possibility that the window will be shut permanently.
When asked if the window would remain open beyond its schedule September expiration, Mr Steel said, “I stressed the word temporary.” The interviewer then pointed out that the word temporary was not used in Merrill Lynch CEO John Thain’s discussion of the window earlier in the conference. Steel reiterated: “Notice I used it twice.”
With government officials stressing the dangers of the window and its temporary nature, it’s a wonder that Wall Street continues to widely believe that the window is permanent. The mainstream financial media is also stuck in this story line. Not one wire story or newspaper report on Steel’s remarks even used the word “temporary.” How many times does Steel have to say “temporary” before the message gets through?

It’s often been said that we’re in the worst financial crisis since the 1930s. So perhaps its no surprise that we seem on the verge of the biggest financial regulatory overhaul since the Great Depression. But we certainly didn’t expect anything this sweeping to come out of the Bush administration. We clearly underestimated these guys. Talk about shock and awe.
But we’re getting ahead of ourselves. Over the weekend Treasury Secretary Hank Paulson released the outline of his controversial and sweeping a plan to overhaul financial regulation. He would eliminate thed SEC, FDIC, CFTC, OTS and OCC. And after dumping out this bowl of alphabet soup, he would fill it right back up again with the Prudential Financial Regulatory Agency , the Conduct of Business Regulatory Agency, the Federal Insurance Guarantee Corporation and the Corporate Finance Regulator. It’s going to take some time to digest these changes.
Later this morning, Paulson will give a speech about this plan. In the meantime, the plan is already coming under criticism. Barney Frank worries that the plan may take too much power away from states, particularly (from what we’ve been lead to understand) in the area of regulating insurance. Larry Ribstein worries that the new, more concentrated structure of regulation could result in losing significant flexibility in financial innovation.
“On this latter point, consider that the CFTC’s replacement, CBRA is likely to be less accommodating,” Ribstein writes. He adds that “with one regulatory agency we’re likely to get fewer new financial products.”
We’re going to hold back for now, as we attempt to work through what’s known about the plan. Let’s see what Paulson has to say. More later today.
Paulson Plan Begins Battle Over How To Police Market
Paulson’s big bang [Ideoblog]