Interest Rate Roundup

Sunday, September 07, 2008

The unprecedented bailout of Fannie Mae and Freddie Mac is official

Details of the unprecedented bailout of the GSEs have been released by Treasury. Full details and links can be accessed here.

Here too is coverage from the Wall Street Journal:

"U.S. federal regulators outlined their takeover of Fannie Mae and Freddie Mac Sunday morning, including control of the firms by their regulator and a Treasury Department purchase of the firms' senior preferred stock.

"The plan, outlined jointly by the Treasury Department and Federal Housing Finance Agency, also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.

"Treasury Secretary Henry Paulson said the two firms are "critical to turning the corner on housing" and that the plan should promote stability in the secondary mortgage market and lower the cost of funding.

"Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible," Mr. Paulson said.

"Mr. Paulson acknowledged that the radical proposal does pose risks for U.S. taxpayers, giving the U.S. government a "large stake in the future value of these entities."

Of all the components of this plan, the idea of Treasury purchasing MBS in the open market is the most striking. Our government is now officially in the business of deciding whether MBS pricing is "correct" or not, and intervening at will to manipulate pricing in the MBS market. For good intentions, of course (the desire to lower mortgage rates). But this is one heck of a scary precedent.


  • Agreed that the govt purchasing MBS could set a potentially troublesome precedent unless a decision is made by the next congress to make them fully government agencies again but like most things with this bailout the MBS purchase authority is temporary, expiring on December 31, 2009 to leave this mess in the hands of the next congress and administration (kick the can is probably the favorite policy game in Washington).

    Given the folks running the show it was actually more surprising to hear the preferred might get hit. If there is really anything to that then that's going to be bad for a lot of players, SWFs, regional banks, and some of the "smartest guys in the room" such as PIMCO who went for the pivot play assuming the preferred would be fully supported.

    By Anonymous Anonymous, at September 7, 2008 at 2:08 PM  

  • So long term, are we looking at lower or higher interest rates for treasuries? Agency yields I can see going lower but will this effect the AAA rating on Treasuries?

    By Anonymous Anonymous, at September 7, 2008 at 6:08 PM  

  • Everyone keeps touting that the worst is over. The scope and pace of the government bailouts provide evidence of the dire nature of the financial industry. So we get a bounce in the markets today, then we continue our steady decline down.

    By Anonymous Anonymous, at September 8, 2008 at 10:07 AM  

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