Word all over after the market close is that Treasury is finalizing its Fannie/Freddie bailout/backstop plans. The plans allegedly include changing senior management -- you think? maybe? gosh -- as well as putting taxpayers on the hook for a few deci-billion more dollars.
More broadly, this isn't a big surprise, but the timing of this coming after Bill Gross's missive yesterday really rankles. Does everyone have to hop every time Gross complains? Is he the bond market incarnate, or just channeling its animal spirits?
[Update] The WSJ now has out a story on it. Not much more detail, other than the reminder that Treasury had a series of high-level meetings today, something may come this weekend, and that Morgan Stanley remains one architect of the plan. We all know nothing would ever leak from a classy shop like Morgan Stanley (MS) back into the market. No-ooooo.
[Update^2] When asked on CNBC after the close whether he had been approached about buying preferred stock or debt in any bailout deal, Pimco's Bill Gross declined to comment. Take that as a "yes", which makes yesterday's note from Gross even more Treasury bludgeoning. To spend the first half of the interview spitting watermelon seeds and pretending not to know much, only to demur on answering that crucial question at the end is ... well, remarkable TV.
[Update^3] Bloomberg says Hank Paulson, Ben Bernanke, Fannie Mae CEO Daniel Mudd, Freddie Mac CEO Richard Syron and Federal Housing Finance Agency director James Lockhart met today in Washington. More importantly, perhaps, it says Morgan Stanley and Mudd et al., are continue to meet at the FHFA, with catered food scheduled for delivery all weekend. And as we all know, bailout plans run on their stomachs.
[Update^4] The Washington Post has more detail, with a conservatorship -- essentially, a government takeover -- in Fannie/Freddie's future, as well as complete management team and board wipeouts in both companies. The preceding was mostly as expected, but it is disconcerting to read that while common shares will be diluted, and preferred shares and debt will be protected, the common will not be wiped out. Granted, people who hung on through a near doubling since August 23rd are now in for a pounding, but they should be zapped entirely. The government has no business using my money to bail out lottery ticket holders with my money, which is what FRE/FNM shareholders are at this point.
Underplayed?
Is the Freddie/Fannie bailout plan being underplayed? News late today that Treasury plans are likely to be announced imminently strikes many people, myself included, as one of the biggest financial events in modern memory, and yet it feels underplayed.
Why do I say that? Well, until recently, it was the second story on the front page of the WSJ this afternoon, and it hadn't even made the front page of the NY Times site last I looked. Marketplace on NPR, which I listen to most afternoons, shrugged it off in a 15-second drive-by comment as some late-breaking news that the market may have noticed.
Remarkable stuff. Here is the Federal Government backstopping a massive financial services organization; okay, two of them; okay, the whole frickin' financial services industry plus the stock market, with China and the rest of the world watching nervously, and it's being treated as just another day in those nutty ol' markets.
But it isn't just another day in the markets. This is set to be epochal, a true "Where were you when..." moment, a before/after sort of of thing. You can't make these kinds of massive financial commitments -- more than a trillion dollars, at least in notional terms -- with so many contingencies, without imagining the kinds of consequences, financial and political, that come with it. After all, the current U.S. administration desperately wanted to punt this past November elections, and it now seems clear that it can't.
The underlined point in the prior paragraph is important to understand. As much as the Treasury and the Bush Administration didn't want to get saddled with this bailout baggage at all, put that to the umpteenth power and you'll get how desperate they were to move this past election day in November. Bush, Paulson, et al., wanted it to be the next Administration's problem, not theirs; and they didn't want it to be fodder in the current electoral cycle. They failed on both counts, which tells you fast and out-of-control this apple cart is.
So, how much will the total liability be? Any upside will be sold hard, but will there ever be a chance to exercise whatever convertible paper Treasury (i.e., you and me) end up holding? Where does it go from here, and who else -- I'm looking at you, Wachovia (WB) and you, Washington Mutual (WM) -- is deemed too big to fail? What happens to the dollar with the Fed working overtime to print money? What happens to treasuries? To the dollar? Inflation? Stay tuned.
