The private sector would eventually ramp up enough to take the places of the GSEs, and lending rates would rise 0.25%-1.00%. That’s not a bad thing, because it would weed out marginal borrowers. Many people should rent, and the social benefits of private ownership are there, but overstated.

One way to look at the FNM and FRE is that they are essentially a giant off-balance sheet SIV of the federal government.

The stakes are getting higher and higher. There could be unintended consequences from this. For example, agency bond yield and treasury yield would start to converge w/ treasury yield rising and agency bond spreads compressing. This MAY have the effect of repricing the whole-world’s bond market to the downside. The concept of the risk-free yield and confidence in it would start to shake.

The other issue is the substantial foreign holding of agency debt. One thing that agency debt has been used is in hedged cross-currency carry trades. There are quite a few players would borrow in yen and swiss francs and invest in the USD. Since hedging the currency exposure would offset the benefit of the carry if they invest in Treasuries, these people instead invested in agencies to get into positive carry w/ hedged currency exposure.

The bond, currency, commodities, and equity markets will be extremely treacherous the next couple of weeks.

I love reading your balanced views on this mess. No doubt they are much “righter” than mine will ever be.

But … why in the world would any obligations be protected with our tax dollars ? These “geniuses” made their bets … they can doggone well live with the consequences. (realizing that the consequences for us all may be quite unpleasant)

I have no duty to bail anybody out of their (dumb) trades.

I don’t think the government should generally do bailouts, but if they do them, those that took significant risks should not get bailed out. This should look and feel like a last resort, and only be done in cases where the government believes bankruptcy would have large negative spillover effects.

FNM/FRE have $31 billion in preferreds outstanding. I saw one estimate that insurers hold about $7 billion of that, which (if we assume that banks hold the majority of the rest) implies banks could see $20 billion more in hits – ASIDE from other credit costs associated with the loan portfolio.

FNM/FRE preferreds being marked to zero could be the straw that breaks the camel’s back for a number of banks – sending them to the capital markets, only to find that the TRUP window is closed, as are perpetual preferreds. Thus, they will be forced to pay through the nose for debt issuance or issue dilutive common equity.

Either way, I think Steve hit it on the head with one word: ugly.

This is what happens when easy money and bailout nation becomes the governing philosophy of crony capitalism. Billion dollar bonuses for Wall Street elites, millions of dollars of contributions to politicians of both parties and of course the revolving door between regulators, policy makers and Wall Street. Rubin, Paulson, Easy Al.

Now the biggest cheerleaders for “free market capitalism” and the repeal of Glass-Steagall and “risk adjusted capital” make even the marxist lenninist communists blush as they scream for nationalization, backstops and bailouts of their losing positions. But those billions in bonuses based on fraudulent financial performance – that’s in the Caymans!

Yes, the shoe is on the other foot!

Well, premarket it seems as though the entire world is selling Fannie and Freddie, the stocks are imploding. If you don’t like the equity, what about the CDS? Those spreads are moving out too, as panic sets in.

Really ugly, although it’s probably a case of “this too shall pass”.

Steve
np