FDIC Commercial Paper Guarantee Could Crowd Out Fannie and Freddie

The Financial Times “GMAC seeks bank status to access bail-out” reports that GMAC’s bid to become a bank holding company could put additional pressure on Fannie Mae (FNM) and Freddie Mac’s (FRE) ability to sell debt at advantageous interest rates. In addition to access to TARP funding that the “winning” financial institutions get, even the potential “losers” can sell debt with FDIC guarantees. The FDIC guarantees principal and interest payments through June 30, 2012 for new commercial paper. The FT is concerned that GMAC could flood the market with billions of FDIC guaranteed debt, crowding out the non-explicitly guaranteed GSE debt.

In "Fannie and Freddie Conservatorship Failing?" and "Treasury’s Elusive Guarantee of Fannie/Freddie Debt and MBS", I wrote that investors were already unconvinced that the government is unconditionally guaranteeing Fannie and Freddie debt. Investors are demanding a premium for GSE debt over treasuries, helping to put a floor under mortgage rates. Now with everyone from General Electric (GE) to American Express (AXP) pushing FDIC insured commercial paper, the GSEs don’t stand a chance at lower rates.

The more programs the Treasury, Fed and FDIC create, the more the programs trample on each other.

Disclosure: Author is long FNM, FRE and GE.

Comments

[briacal:]

where are the better alternatives?

2008 Nov 24 07:36 PM

[Moochacha:]

Give Freddie and Fannie the same guarantees, as Citi etc.

2008 Nov 24 09:08 PM

[poncawolf:]

Time to Make the Inauguration – A March on Washington!

Nothing but the same-ole cons – Take a bunch of money out – driving the prices down – then buying – and do it all over again – and have your con men – yelling – Buy all our predatory loans – With taxpayer money.

Now we must ask – Did we get a visionary – Or another fall man - for the cons?

2008 Nov 25 09:40 AM

[tshk1221:]

It is not the time of criticism. It is a time to try new methods over and over again to solve and break through this unprecedented financial crisis in US history and the world's. We are on the brink of the Greater Depression. We are on a very similar track like the Great Depression of 1930s. The biggest credit bubble in every lending area we can imagine got burst. Financial institutions have burst. Stock market has burst. Individuals have burst. In terms of sheer volume and the speed of the burst, it seems to be worse than the Great Depression of 1930s. If you don't like today's actions by Fed, can you come up with better solutions that can fix the situation in a month or two?

2008 Nov 25 01:06 PM