More on the GSEs

July 13th, 2008 5:22 pm | by John Jansen |

The financial press is replete with stories about meetings in Washington regarding the status of FNMA and Freddie Mac. The gist of the reporting is that the various parties to the conversations are busy discussing various funding options for the GSEs if such aid is warranted.One of the items mentioned in most of the stories is a previously scheduled Freddie Mac sale of $3billion of securities. Bloomberg suggests that the notes are short term and a quick check of the Freddie Mac home page informs the reader that the agency is issuing $2billion 3month bills and $1billion 6 month bills.

The various articles suggest that there is some concern or angst regarding investor support for that sale. The reports suggest that these sales will be an important test of investor sentiment regarding the GSEs. I think that the success of this sale will demonstrate very little. That amount of issuance is paltry and could be funded by Secretary Paulson himself and a dozen of his former colleagues at Goldman Sachs.

In my opinion, the canary in the coal mine for the agencies is the repo market. If large institutional suppliers of funds (money funds and sec lenders) shun agency debt as collateral for their lending, that will mark the beginning of a far more serious phase of the problem and would signal hard times ahead. So I will busy myself in the early trading tomorrow observing the movements in the rate at which agency collateral trades relative to government collateral.

I also think that this entire conversation will be (for the short term) academic if the Treasury announces a substantial capital infusion sometime later this evening. If that occurs, the spread narrowing trade which began on Friday should continue with a vengeance.

The statement that Paulson delivered on Friday was meaningless and senseless. I believe that they will announce serious measures this evening to support the eviscerated and hobbled mortgage giants.

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  1. 2 Responses to “More on the GSEs”

  2. By hedgingrisk on Jul 13, 2008 | Reply

    Paulson statement has zero steak, just possible flavor enhancements…

    Markets are being jammed higher in the futures arena… As if all is better now…

    This could end badly…

  3. By hedgingrisk on Jul 13, 2008 | Reply

    Federal Reserve Bank NY is now involved…

    Tomorrow should be more then interesting…

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