WSJ Says: Fannie Mae & Freddie Mac Will Be Put Into Conservatorship

The Wall Street Journal broke a story after the market closed today that the US Treasury Department was “close” to a plan to provide aid to Fannie Mae and Freddie Mac.

(Link to Article)

The Wall Street Journal said that an announcement may come as early as this weekend. My guess is that if there is going to be any announcement it will be on Sunday before the Asian markets open.

So far, Fannie and Freddie are declining to comment and so is the US Treasury Department. There are more questions than answers right now. I can assure you that Lisa and I will be monitoring this situation very closely and will report on it as soon as we obtain any additional information.

Because this news came out after the futures market had closed up for the weekend we can’t gauge the initial reaction of this news. However, the common shares of Freddie and Fannie did tumble after hours as it is thought that whatever the plan is it will wipe out the common shares. Also, there was a reaction in the bond market (TLT) which would signal a selling of treasury notes.

Like I said… many more questions than there are answers for right now. Will this be an ultimate “stick save”, or will it be one of the biggest blunders in history by the Treasury Department? IF the latter is the view taken by the markets, then we could very well see the bond market crash, which we warned about months ago. All conjuncture at this point and we need to see what kind of plan Hank Paulson has cooked up.

But if Fannie and Freddie do indeed go into conservatorship as is being reported by the Wall Street Journal, and Treasury Secretary Paulson uses his blank check (from you and I tax payers) to prop up their losses, then the US Government (you and I) will essentially become the new holders of Trillions of dollars of mortgage paper.

Will this restore confidence in the financial system, or will it further erode what little confidence remains?

Will the US Dollar tank on this news? Will Gold soar? Will the bond market like this or hate it? What will the equities market make of this? Lots of unknowns right now. But one thing is certain, and that is this is a historic event in my view. The credit and housing markets have become so crippled it is requiring drastic measures to backstop it. But will the backstop only provide proof that the system is indeed ‘beyond repair’?

Should be a VERY interesting Monday if there is any kind of official announcement over the weekend. Stay tuned…

Posted in Categories: Contributor, External Research, Financial, Stocks, USA.

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Comment by John C. Sutherland

2008-09-06 03:53:02

For the Treasury to wipe out all equity securities of FNMA and FMAC would be
a total breach of good faith. It would severely taint the credit of the government and torpedo the acceptability of even debt securities of those
agencies. How is such a sweeping change possible without support from the
Congress? It would never be forthcoming.

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