Unlike New Orleans, the levees of the global economy have broken, one after another.
Also unlike New Orleans, a significant part of the global economy still lies in the path of this hurricane…
First, the success of the action depends partly on whether it “crowds in” capital from both domestic and foreign sources….the US government is already running a growing fiscal deficit and the country as a whole has a current account deficit, its balance sheet must be supported by other capital inflows, especially on the part of foreign holders of US debt who have become increasingly skittish in recent weeks.
Second, the action must be part of a broader policy response that has both a domestic and international dimension.
In this regard I have been impressed by the repeated observations of officials from countries that previously experienced the brutality of deleveraging hurricanes, particularly in Asia in 1997-98. Noting the piecemeal nature of US policies in the past year, they stress the importance of a holistic response from the authorities, including meaningful co-ordination of an often-diffused domestic policy apparatus and explicit, timely and targeted international support. This means, at the minimum, alleviating the housing problem in other stretched jurisdictions.
From Floyd Norris at the New York Times:
Who could have forecast that it would be under the Bush administration, which talked about restraining the growth of these behemoths, that they came to totally dominate the mortgage markets? Now the administration wants to have it both ways in that area as well. Fannie and Freddie are ordered to start shrinking — in 2010, after a new president will be in office. Until then, they are supposed to grow.
From the normally measured Paul Jackson:
This is no longer the worst mortgage crisis since the Great Depression; this is the worst mortgage crisis, period. It’s also the end of an era. The U.S. Treasury on Sunday announced a takeover of both Fannie Mae and Freddie Mac, a move that has nearly no precedent in U.S. history….Under the Treasury preferred stock purchase agreement, the government may purchase an additional $100 billion in preferred interests in each GSE if needed, although FHFA director James Lockhart suggested such a large investment likely wouldn’t be needed.
But after hearing from Lockhart for weeks that the GSEs were in solid financial condition, and that the Treasury had no intention to step in, how much of whatever is said can really be believed at this point?
Nouriel Roubini is not a fan: “. This bailout plan has mostly lousy features that exacerbate the moral hazard of this government intervention and the overall fiscal costs of such intervention.” He gives a dozen objections. Some of the more interesting:
…common shareholders instead of being fully wiped out –as they do deserve – will only be diluted and hold about 20% ownership of the GSEs. There is no justification for this even partial bailout of the common shareholders as the two GSEs are insolvent…
the government plan includes the provision of credit lines – of an amount that is not specified but is potentially as high the Treasury wants – to Fannie and Freddie and to the other 12 FHLBs. The Treasury statement does not clarify whether these credit lines will be senior to other subordinated and unsecured agency debt or not. Since this provision of credit is a form of debtor in possession financing – like IMF lending to countries under distress – it should be de jure senior to the debt issued by the GSEs; it should also be senior to the mortgage claims that the GSEs have guaranteed. Instead, the Treasury’s silence about this matter suggests that these credit lines will not have any seniority compared to the unsecured debt of the GSEs.
From Michael Shedlock:
In theory this is a bottomless sinkhole, especially in light of the fact that systemic risk will be increasing over the next 16 months (and probably beyond that).
From Ben Bitroff:
Tomorrow morning equities are gonna fly, especially financials… for how long, I can’t even begin to predict. But one thing is for certain. The crash is going to be spectacular.
Yields are screaming higher across the curve as it suddenly becomes very very clear the US debt has at least doubled, if not tripled and more on this bailout. The US dollar is getting whacked across all major FX pairs. Commodities are catching a bid. This is not good for anybody.
You also must read Paulson’s Statement on Freddie and Fannie with a Nearly Simultaneous Translation at Jesse’s Cafe Americain. Hysterical and on target.
In contrast, Chris Whalen, who had advocated a conservatorship, was positive.
Originally published at Naked Capitalism and reproduced here with the author’s permission.