Subordinated Debt Holders: Missed By the Bus?

Includes: FMCC, FNMA
by: John Jansen

Why has there not been more discussion about the treatment of the subordinated debt holders? Those investors knowingly and with premeditation (I assume) purchased paper which was “riskier” than other agency debt. They received a chunky yield pick up for their faith in that lower rated paper.

Now the GSEs are in conservatorship or whichever euphemism you choose to apply, and the subordinated holders are faring as well as the senior holders. Preferred shareholders and common holders were thrown under the bus. In the interest of equity, the subordinated shareholders should have at least been grazed by the bus. I think that fairness requires that there should be  a symbolic haircut of some sort which would take maybe just a penny on the dollar from these folks. Otherwise the sermonizing about moral hazard is  pompous cant.

The Treasury market is staging a significant recovery. I am told that the giant rally in mortgages has generated a huge need for mortgage servicers to strap on some duration. One dealer posited that the duration need from that source was around $70 billion.

Why did the Treasury leave the “wrap” function of the agencies untouched? They will run off their portfolios beginning in 2010 but can “wrap” as if there is no tomorrow? Am I wrong on that? If so, please tell me. If the goal is to significantly involve private sector companies at some point in this business, that will not happen with FNMA (FNM) and Freddie Mac (FRE) unshackled in this regard.