Mahant

Much to Like About the GSE Rescue

We are a capitalist country and have proudly followed free market theories and have shown to the world how by practising we have brought about overall economic development in countries that have joined us in this effort.

GSE's were originally created to provide mortgage finance to primary mortgage institutions by refinancing them thru consolidation of loans and securitisation. The process was simple. Original funding was done by federal Govt. at interest rates which were low to enable GSE's to rediscount at lower rates so that needy low income and middle income citizens could get mortgages at reasonable interest rates. They were allowed to issue Bonds to public and there was an implied understanding that since these institutions are created by Congress they will have full support of Uncle Sam. Their Bonds have been rated As AAA for that reason right from the beginning. Most conservative retirees have invested in their Bonds for earning fixed interest income as their rate of interest is slightly higher than GINNIE MAES whose Bonds are expressly guaranteed by Govt.

Two things are not understandable. First why these institutions would have run into losses when they were allowed substantial leverage by Federal Govt and Federal Reserve plus funding by public at rates much lower than the rates at which these institutions have been rediscounting as their spreads were always maintained and guranteed. Losses appear to be the result of mismanagement and lack of control on overheads. This seems to have happened despite close watch of Federal Reserve System and oversight of Congress. A thorough expert investigation is needed as Congressional Hearings are not enough.

Secondly on one side Mr. Paulson and Bernanke have been able to come up with a Plan which will provide emergency funding and even buying shares of both Freddy and Fannie ( commendable indeed to save the system) poor shareholders have been given clear cut message that since these two are bankrupt (per one Fedral Reserve Governor) they should not have any hope of recovering their equity. The most surprising innuendo in your artcle is that Bondholders should also be prepared to loose. In nutshell conservative retirres who are shareholders and bondholders in these GSE's ( carriers of implied Federal Govt. Guarantee) should be ready to bear this additional indirect tax as a result of mismanagement by Administration, Federal Reserve and Congress. In fact I hold Freddy and Fannie Bonds and my broker has advised by way of a footnote in my latest Statement that interest on these Bonds has not been paid and may not be paid so I should not plan things based on this estimated/accrued interest. This information has not been made public by either CNBC or other media so far and I do not know what action has been taken by Debt rating Agencies as GSE's would definitely have advised them and any action by them would create additional flutter.