A picture is indeed worth a thousand words and in this case, a potentially large haircut for its owners. Why do you think Bill Gross has been making the circuit harder than ever over the past couple of weeks.
Why again should the $5 trillion in Fannie Mae/Freddie Mac senior mortgage backed debt be backed by the US taxpayer? I can’t believe that China, Russia and Bill Gross have never actually seen a Pass-through before. The one that says “ARE NOT GUARANTEED BY THE UNITED STATES, AND DO NOT CONSTITUTE A DEBT OR OBLIGATION OF THE UNITED STATES OR ANY OF ITS AGENCIES OR INSTRUMENTALITIES OTHER THAN FANNIE MAE”. The one below is from July 2008. They invested in these higher-risk securities for a higher payout. Simple.
Look at the big ‘ol black letters right below the Fannie Mae Logo and security description. That is what they call a ‘disclaimer’, investors. Bill Gross has been out for months scooping these securities at depressed prices hoping the tax payers make him a profit.
If .gov backstops everything, open-ended and retroactive, US Treasuries sit in a precarious position. WHAT IF spreads go the wrong way due to a buyers strike on Treasuries. If they back this debt, there is no going back.
Of the $5 trillion, we know that about $1.2 trillion is Alt-A and Subprime and another $1 – 1.5 trillion plus could act much closer to Alt-A and Subprime in the future. This is due to faulty automated underwriting systems called DU and LP respectively, set to ‘way too easy’ mode during the bubble years. $5 trillion is equal to the entire public float of the US Treasury with $1 trillion owned by foreign central banks. They undoubtedly bought this stuff with full knowledge it was not backed by the Government.
I put out a story on this earlier: Fannie/ Freddie: Now We Wait for Help or Hell