Fannie and Freddie Debt Offerings

Media and politicians are hyping Freddie’s $2 billion of debt offerings as a big win. They even go so far as to say this means that there is less likelihood that Fannie (FNM) and Freddie (FRE) will be nationalized. Click here for the hype.

I don’t see it the way they do. If you believe the government is going to take over, there is minimal risk to buying the debt at higher yields. I might be impressed if the Treasury came out a few minutes before the offering and said “We will not nationalize Freddie Mac” and then debt investors bought the debt anyway at market interest rates for 3-month and 6-month paper. But that is not what happened.  I might be impressed if they sold equity without a discount even though a bailout would wipe out that new equity. But that is not what happened. They offered new debt at high yields. That is not impressive to me. I don’t see this offering as any evidence that a government takeover is less likely.

Comments

[horned toad...:]

Evidence of the bazooka Paulson was talking about. The government won't swoop in and take over if FRE and FNM can operate normally and that the government is more or less guaranteeing the debt, assuaging the concerns of buyers, FRE and FNM can operate normally (make debt sales at reasonable spreads).

2008 Aug 26 09:32 AM

[PhinT:]

Humm… Would love to agree but once again another opinion supporting the shorting and unwind of the Market... I am long on FNM

2008 Aug 26 09:55 AM

[whidbey:]

You are correct, this is not a test of market acceptance, but the same kind of speculation that put the GSE in play to start with.

Anything to be hopeful about? Yes, the hype suggests the government does not want to "own" the GSE, now if we can just figure out who is likely to want them, bombs and all, anytime soon. Not looking good.

2008 Aug 26 02:14 PM