ardano

Troubling Aspects to the GSE Bailout Bill

Once again, with feeling, FNM and FRE debt will be protected at all costs. Think about who holds that paper...Paulson and Bernanke seemed to have flipped a coin to see who is going to backstop the GSE's. Bernanke's a little busy right now propping up banks, brokers and other institutional investors. I think he said, "hey Hank, why don't you take this one." After all we're only talking $5Trillion. Due to longstanding accounting problems it was only dumb luck that Fannie and Freddie didn't have more bad paper on their books. They could not originate subprime, only acquire suspect paper through other procedures. Unfortunately, due to the implicit backing of the Treasury, soon to be explicit, Fannie and Freddie lack the cushion that is keeping other traditional banks barely solvent. However, if the backing of the Treasury has meaning, and I think it does, what's the difference? Oh that's right, there's the question about morals and banking. People will say all that money was paid out through Fannie and Freddie and now the taxpayers are caught holding the bag.

Trade of the day, buy Fannie and Freddie debt, not the equity, and short the long Treasury and US Dollar as more paper will have to be floated to make implicit explicit