Fannie and Freddie: Bailout, CDS

Fannie (FNM) and Freddie (FRE) tanked Friday after hours, down about 30%.
SPY is up close to 2%.

From the WSJ:
The plan is expected to involve a creative use of Treasury’s new authority to make a capital injection into the beleaguered giants.
Treasury Is Close to Finalizing Plan to Backstop Fannie, Freddie

IF Fannie and Freddie are placed into a conservatorship, the party line is that CDS would be triggered.

U.S. Rescue Seen at Hand for 2 Mortgage Giants
U.S. to take control of Fannie and Freddie: reports
Questions, and Hope, on Plans for Mortgage Giants
Fannie, Freddie’s boards meet Saturday to mull government plan
Obama Says Freddie, Fannie Too Large for U.S. to Let Them Fail

The Bloomberg piece below explains the case when the CDS wouldn’t not be triggered:
Fannie, Freddie Debt Deferral May Not Trigger Swaps

Comments

[Ishortyou:]

I dont necessarily aggree that CDS would be tirggered, because there would be an explicit government guarantee on all those CDS-MBS bundles. I think the CDS are in better shape in government hands than FRE and FAN administration.

2008 Sep 07 09:06 AM

[J.C. Kommer:]

the CDS should trigger because there is a "credit event", in this case "bankruptcy which has a broad definition, roughly bankruptcy means (for a CDS contract) “…the appointment of a conservator, receiver, trustee…. etc…..as well as any public or private action which results in an issuer relinquishing control of its assets, operations or management.”
clearly the case here, but i am not a lawyer…

the losers will be the protection buyers since the debt is actually becoming more explicitly guaranteed by the government than ever before and yields should move towards treasuries, but the fact that debt holders will be made whole is irrelevant to effect the trigger, only the “credit event” matters.

2008 Sep 07 05:53 PM