FIG trader_

GSEs: The Tail Wagging the Credit Market Dog?

Jimmy, sorry grunting doesn't count as a legitimate response. I'll try to keep it to one syllable words for you next time.
Richo, Not sure what your disagreement is. Most of your points are correct though don't address the implied methodology for valuing the GSE's. To repeat, it is a bet on stabilization of house prices (reasonable 15% to 25% below national peak price levels), resumption of more normalized spread levels on MBS (GSE and non GSE backed) by 2009/2010, return to 8% to 10% mortgage credit nationally (more than 30 years of history on that), and absolute levels of mortgage rates stabilized below the 6% to 7% range for several years. Somewhat optimistic, but not unreasonable given it will be top of policy agenda (and should be). I am taking cues from Pimco's view on the necessity of multi-pronged policy response to stabilize house prices, and the GSE
s well collateralized guarantee book.

GSEs: The Tail Wagging the Credit Market Dog?

1) Market reflects bad news, needs housing price stability. But, worse case scenario is behind us; a 1/100 year crisis of confidence event in the credit markets/mortgage paper.
2) reversing 2/3 of the MBS mark to market (non-subprime) probably a gradual 12-18 month event
3)Capital will be costly, and it is a race against time, the wider the spreads and deeper discount to book the stock carries, the more dilutive the action. Conversely, if allowed to expand mortgage portfolio aggressively on the cheap and MBS spreads tighten late 2008 2009, they will print money in 2009/2010/2011 and beyond. Lots of thrifts well below book (most of them in fact, of special interest are those based in California). This is the safest if there is another big leg down (which I doubt, but you never know)

Freddie Mac: Capitalize on Subprime Chaos

Under separate cover (through your firms message system), I have sent you the long/short arbitrage dated 2004 (long FRE/short FNM), check the subsequent collapse and underperformance of FNM. You could have made a lot of money. Check the blog for reco on FRE/FNM in begiinging of year.