The Treasury Shaking Up the Market

On Friday, the WSJ reported that the Treasury was in the works to takeover Fannie Mae (FNM) and Freddie Mac (FRE). The plan is expected to be detailed in 30 minutes at a press conference held by the Treasury. After the news was released on Friday, after market trading indicated a lower dollar because the takeover is going to increase the debt on the U.S. balance sheet. The shareholders are almost certainly going to be wiped out including both common and preferred which could inflict greater damage on the markets because many banks hold the preferred and if it gets cleared out they will be left with even less capital on their balance sheet.

It seems like the Fed and the Treasury have been doing a lot of work on Sunday's (Bear Stearns) which points to the seriousness of the issue. Many people have called for much more immediate action with Fannie and Freddie and this could also create some relief for the credit markets, but the details of the plan are critical because the 2 companies are said to hold $12T worth of mortgages which is over 50% of all mortgages in the nation. This is going to cost taxpayer dollars and right now with a budget deficit there is no wiggle room for inefficient policy. I think it's ironic that these companies that were created to help consumers through lower mortgage rates, but now in order to fix these GSEs taxpayers money is going to be used. Hopefully the new plan will allow the government to create liquidity in the mortgage market without creating a large tax burden on the American public.

More to come on this once the Treasury releases its plan!


UPDATE:

Plan Overview:http://online.wsj.com/article/SB122079276849707821.html?mod=hpp_us_whats_news

Official Statement:http://blogs.wsj.com/economics/2008/09/07/officials-statements-on-fannie-mae-and-freddie-mac/