Bazooka Strategy Seems To Be Working, For Today

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The plan to bolster Fannie Mae and Freddie Mac by talking up the Treasury's ability to bailout their debt while talking down the possibility that the two government sponsored mortgage companies could nationalized seems to be working.
Reuters reported early this morning that the Treasury Department believes that the two companies should remain "shareholder-owned," something that Merrill was reportedly telling clients on Friday. We reported earlier that regulators have recently become concerned that wiping out the shareholders of the companies could damage the balance sheets of regional banks and insurers, who hold vast amounts of the preferred shares of these companies.
This morning Freddie Mac easily placed $2 billion of debt with investors, which will also be taken as a sign that the companies can continue to fund their ongoing operations without a government takeover or bailout. Of course, the ease of debt sale already reflects the "bazooka bailout" that occurred when the Treasury was granted powers last month to extend credit lines to Fannie and Freddie and buy their debt and equity.
The term bazooka bailout, of course, comes from Treasury Secretary Hank Paulson's description of his unlimited power to bailout Fannie and Freddie. "If you have a bazooka in your pocket and people know it, you probably won't have to take it out," Paulson told lawmakers when asking for the bailout powers.

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