Treasury Secretary Paulson Wants Fannie, Freddie Stocks Higher

Treasury Secretary Paulson ditched moral hazard Sunday evening as I predicted in "Beware of Sending Fannie/Freddie Stocks to Zero". Say “Oh Shucks” to all the rhetoric that wreaked havoc on the GSE stocks Friday. Even if he wanted to, Paulson could not nationalize or even dilute their equity base without Congress.

We now have a three part plan: open the Fed’s discount window (starting now), and with Congressional legislation raise the Treasury line of credit and allow the Treasury to buy GSE equity. There is no indication that the White House wants to buy equity in the GSEs, and no indication that the White House wants to punish shareholders. All three measures are only confidence builders and you can be sure that Congress will question the equity component.

The objectives are clear: strengthen the implied government guarantee on GSE debt and prop up their stock prices so they can raise additional equity. I don’t believe the Treasury or the Fed really expect the GSEs to use their lending facilities. The White House just wants to GSEs to be able to rollover their debt in the “free market” at prices close to treasuries.

The White House and Congress realize that the GSEs cannot expand their portfolios without more capital. So on Sunday, they reluctantly concluded that the economy truly depends on a strong Fannie Mae (FNM) and Freddie Mac (FRE) stock price. Let the bulls feast while the bears run for cover.

Disclosure: Author is long FNM and FRE.

Comments

[iThinkBig]

Ahh, the American taxpayer. All 100 million of us get to do all the heavy lifting in rebuilding while 10,000 people see the sights of the world on yachts that would make Caligula blush. Sad, but ultimately predictable of every government. It's a shame our politicians think our current government is too big to fail and will be the last place meaningful cuts occur (when it should be first as an example to it's populace).

[borisb]

The expedited housing bill might mop up some of the morgages in default and spare the morgage industry and maybe even Freddie/Fannie some pain.