Please forgive any punctuation or spelling errors you may find here. I continue to have trouble with the edit function of my blogger account. I will have things back to normal shortly.
Fannie Mae and Freddie Mac appear to be headed toward a rendezvous with something that John Maynard Keynes would advocate -- a bailout. Within days they are likely to be getting a helping and "visible hand" from Uncle Sam in the form of government loan guarantees and capital infusions to strengthen their capital bases.
At issue is their net capital -- they don't appear to have enough of it to carry the trillions of dollars of mortgage loans that the two hold between them, especially when housing prices are falling and defaults are rising. As big and as powerful as Fannie and Freddie are, they could not stand as the savior of the housing industry. Only the
2. Collateralized Mortgage Obligations guaranteed by Fannie or Freddie: These, too, just got a lot safer, though they were already had a high degree of safety even before this move because of their high quality collateral.
3. Preferred Stocks: The devil might be in the details here, but as I read Mr. Paulson's plan, Fannie and Freddie's preferred stocks should get and immediate boost. They just got a lot safer because there is now little likelihood that Fannie and Freddie will fail.
4. The wild card is the common stock: I think that was the reason these two stocks were so weak on Friday. If the government is going to take an equity position, it will be very dilutive to current shareholders if it looks like the private equity deals. Having said this, the stocks might pop a little higher if it looks like the deal will be approved quickly.
To me it was inevitable that the government would have to get into the mortgage business to turn around housing. I am very hopeful that in doing so, they have truly begun the beginning of a turn around in real estate.