Rescuing the Drowning: $15B on the Way to Freddie and Fannie Mae?

The London Times is reporting in its Sunday edition that the US Treasury is planning a $15 billion capital infusion for FNMA and Freddie Mac. There is nothing definititve in the article about the timing,though there is speculation that it would occur before the markets open Monday.

According to the article the Treasury would receive a new class of shares and the transaction would be hugely dilutive to sharehoders. The article also states that the GSEs would receive access to the discount window.

Access to the discount window used to be a privilege but now seems like a right of passage on the road to financial oblivion.

The article quotes an equity analyst, Howard Shapiro, of Fox-Pitt Kelton. I hope he has been quoted horribly out of context. He proclaims that each of the firms is fundamentally sound. I would say “res ipsa loquitur”which means “the thing speaks for itself”.

The US Treasury does not lob $15 billion dollops of cash at fundamentally sound entities on summer weekends.

Finally, if this story is true, then the trend which began on Friday will continue and spreads on agency debt should tighten dramatically to Treasury debt of similar maturity.

Shareholders will not do as well and will spend time under the bus.

Comments

[richjoy]

1) I hope the story is true (the 'window' story on Friday was not true)--this situation can't be allowed to bring down all confidence in the GSE's, the financials, and the markets.
2) The announcement needs to be made before NY opens on Monday.
3) Any bailout should NOT protect the owners of FNM and FRE (that's the shareholders if you didn't realize it).
4) We are in a recession, and we will still be in a recession after this announcement; but relieving this situation will remove a source of potential U.S. market panic which could also reach worldwide.

[raylopez99]

Why should the government bail out an entity not yet in trouble? One estimate on Friday was that housing had to decrease by another 30% before FRE, FNM were undercapitalized. This is another ploy by regulators to get glory or more responsibility, which means a bigger budget. They should be resisted. Yes I'm long.

[Vegasjoe]

Fannie and Freddie ought to change their names to Barney and Teddy
And when all the paper goes broke, Obama will wonder what joke
Was played on him to be President of a third world joke!

[James Cullen]

Perhaps Shapiro meant that, after receiving $15 billion in immediate capital and carte blanche at the discount window, Fannie and Freddie will be fundamentally sound.

[cheesecake]

100% agreement with Mr. Jansen. Great read.