This entire Fanron and Frauddie deal is still bugging at me. So much, yet so little has happened in the past week my head is still spinning. Its like ‘whoa, did we just experience two of the largest financial institutions in the world fail amidst a web of potential fraud fail last weekend? Whoa, Whoa!’
I have spoken often about their implicit guaranty, how Treasury does not have the authority to make it explicit and how Paulson’s ‘announcement’ this weekend was just that…an announcement. Upon an administration change this ‘deal’ can be retracted and the sub and senior debt holders left holding securities with cash flows based upon the strength of the underlying collateral and not the US tax payer.
Well, my opinions are not playing out…yet. But there are a few things that point to a chance that they may. First is the Congressional Budget Office saying in a couple of months ago and just recently, ‘hey, you want ’em Hank, you take ’em. Nobody else can afford this mess’. Second was a strange ‘Breaking News’ event today on CNBC worth noting. Paul Jackson of Housing Wire wrote up the first story yesterday.
GSE’s Should Be Directly on Treasury’s Books: CBO
Sept 10, 2008 By Paul Jackson Housing Wire
For all of the press the Treasury/Federal Housing Finance Agency bailout of Fannie Mae and Freddie Mac has received, it’s the nuances that are now starting to come into clearer view that will determine the future course of mortgage lending in the United States. The Congressional Budget Office opened up the latest can of worms on Tuesday by suggesting that the Treasury needs to take the full operations of each GSE directly onto its balance sheet.
“It is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget,” said Peter Orszag, CBO director, in a post on his own blog. “The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.”
The Financial Times’ Krishna Guha in Washington reported that the White House was caught off guard by Orzag’s recommendation. They shouldn’t have been; the CBO said on July 22 that “a strong argument can be made that if the Treasury used the proposed authority, the GSEs’ operations should be incorporated directly into the federal budget.”
How do US Treasury investors view this move?
U.S. credit default swaps moved to record highs on Tuesday, a move due in no small part to investor uncertainty over the future of Fannie Mae and Freddie Mac; the CBO’s position on accounting for each will clearly factor into forward expectations, sources told HW on Wednesday.
“The more the market thinks of agency debt as Treasury debt the more it will add total agency debt to Treasury debt in assessing the United States long-term fiscal health,” Alan Ruskin, chief international strategist at RBS Greenwich, told Reuters.
Then today out of the blue ‘Breaking News’ came across CBNC. It was Steve Leisman saying (loosely quoted) that ‘the Treasury has made a statement that it stands behind its decision to back Fannie/Freddie and their debt, it is a legally binding contract and will not be undone the by future administration or Treasury Secretary’.
It was a very awkward ‘Breaking News’ event. By the look in Steve’s face and tone of voice, I believe even he thought there was more to it. It really came out of left field. It seemed unimportant unless of course, large MBS holders are planning to use this pop in prices to unload in grand fashion before Paulson exits stage left. That has been my contention from day one. Marketwatch does a good job breaking down this strange report.
One of the smartest people I know, Bill King also brought this up in his nightly report:
My father always said ‘if you have to defend yourself, you are losing the damn argument’. True enough Dad, true enough. -Best, Mr Mortgage
U.S. Treasury moves to calm Japanese investors
Nikkei: U.S. authorities seek to prevent unloading of Fannie, Freddie bonds
Last update: 6:26 p.m. EDT Sept. 11, 2008 SAN FRANCISCO (MarketWatch) — Seeking to head off any unloading of Fannie Mae and Freddie Mac bonds by Japanese investors, the U.S. Treasury Department is taking the unusual step of directly contacting Japanese financial institutions about the plan to rescue the mortgage giants, according to a published report.
Because a massive unloading of Fannie Mae … and Freddie Mac … holdings could hamper the U.S. government’s efforts to shore up the mortgage firms’ finances, the Treasury Department is effectively asking investors to refrain from doing so, Japanese business daily Nikkei said on its Website in a report dated Friday.
According to sources familiar with the matter, Treasury Undersecretary for International Affairs David McCormick on Thursday phoned senior executives at major Japanese banks as well as the Life Insurance Association of Japan to explain Washington’s plans for Fannie Mae and Freddie Mac, the report said.
McCormick is believed to have reiterated plans announced Sunday, including seizure of both mortgage giants and the government’s intention to infuse funds if necessary. During the phone calls, he is also said to have urged Japanese institutions to continue investing with confidence in Fannie Mae and Freddie Mac.
According to a Nikkei report earlier this week, Japanese financial institutions own more than 15 trillion yen ($142.5 billion) in securities issued by based on data disclosed by domestic banks, life insurers and others as of March 31. Many Japanese investment trusts also include securities in their portfolios.
The Treasury Department is expected to continue contacting other major Japanese banks and institutional investors, and the Life Insurance Association of Japan is expected to notify its members of the explanations provided by the U.S., Nikkei said.
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