What We're Hearing

Some of you may be asking this very basic question: why does the Treasury Department keep pumping money into Fannie Mae and Freddie Mac to keep their net worth positions above zero? The answer (as I may have pointed out before) has to do with their bond offerings. Would you buy debt in a company that has a negative net worth position? Okay, you might, but the rate on the bonds would be in the "junk" territory. So, that's why Uncle Sam keeps the cash flowing to the GSEs -- and because Fannie and Freddie are the linchpins to the housing market. (If they had to pay 'junk' rates of say 10% that means mortgage rates would be...feel free to bill in the blank.) Interestingly, even though the GSEs still do not have the "explicit" backing of the U.S. government, they really do. (Nod, nod, wink, wink.) Uncle just won't admit it because that means their liabilities (holdings plus guarantees) would probably wind up on the balance sheet of the Treasury. When it comes to restructuring the GSEs, one basic question elected officials and financial service professionals need to answer is this: if Fannie and Freddie go away who will provide the $5 trillion in guarantees and balance sheet capacity that they currently provide? This is what we call a conundrum...