SW Richmond

Where Are the Bank Failures in This Financial Crisis?

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Fannie and Freddie are an interesting case. Any bailout of Fannie and Freddie must be structured so as to NOT be categorized as a default which would trigger CDS payouts. Anything likely to trigger a widespread CDS claims event could possibly bring down the house, witness the "I just crapped my pants" reaction to Bear Stearns. But any bailout of Fannie and Freddie that does NOT wipe out shareholders will be hugely burdensome on the US taxpayer and carry a heavy burden of obvious and oh-so public "moral hazard".

It's my understanding that the regionals et al were heartily encouraged to stuff their balance sheets with Fannie and Freddie debt, since after all they were "agencies" of the dot gov. So wiping out shareholders and giving a haircut to preferreds and senior debt could kill off the regionals, who are already on life support. So Paulson's challenge is to stuff a whole lotta dough into Fannie and Freddie without triggering defaults. Remember when the bailout seemed certain, and then all of a sudden: "Hey, maybe we won't need to bail them out, they might be OK after all!!" Someone realized the quandary.

"Is that a bazooka in your pocket, or are you just glad to see me?"