Sunday, September 07, 2008

Fannie and Freddie

It will be interesting to see how the markets react to the takeover of Freddie and Fannie tomorrow. I predict positive (not for their stocks, but for overall market). There was no immediate reason for the takeover, it was just good action given the overall circumstances and, especially, it was a great time to clean up an age old problem.

I think this quote from Paulson sums up a lot: "These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS."

One can criticize a lot of prior administrations for not cleaning this up before. But sometimes it takes a crisis to give one a reason for action. That is the silk lining in this sow's ear -- finally we get these monsters, manipulated by politicians for their own benefit, out of the public domain (not in the short run of course, but in the medium term).

Those who are calling this a bailout at the taxpayer's expense should think twice. This is a takeover, and it is not being done at a premium. The government is basically dictating quite onerous terms, beginning with the firing of both CEOs and warrants to buy up to 80% of both firms at nominal cost. I think my Ricardian tax liability just went down -- I will in fact go celebrate.

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