My Fannie Mae (FNM) and Freddie Mac (FRE)
preferreds were listening today to:
“Remarks by Treasury Secretary Henry M. Paulson, Jr. on The Role of the GSEs in Supporting the Housing Recovery before the Economic Club of Washington”. I cannot say for sure that some doubled from their sub-dollar base due to Paulson, but much of the
Paulson team and financial rescue infrastructure will remain with the new President Obama Administration.
My guess is that Geithner will follow Paulson’s lead when he inherits the Treasury Secretary post, despite Summers and Bernanke’s lack of discipline on fiscal and monetary expansion. Let the floodgates open. But, remember Paulson is always looking for ROI, even though at times his plans appear to be
schizophrenic. While Obama, Summers and Bernanke appear to be soul brothers in “better to over stimulate then not enough”, they appear confused in how to structure long-term benefits. This leaves an opening for Paulson via Geithner to direct the evolution of Fannie and Freddie out of conservatorship.
Paulson gave us additional insight into why he structured the GSE rescues as conservatorships. He purposely did not ask Congress for an explicit government guarantee of Fannie and Freddie debt and MBS because he did not want to lose the
discipline of private sector credit evaluation. At the same time he did not believe the private sector had the capacity to guarantee the totality of the mortgage market, citing the difficulties encountered by the monolines (ABK and MBI). All this was of course academic when no one was willing to buy GSE securities without some type of government guarantee. But, Paulson was actually planning the exit strategy from the start.
Paulson sees support for the mortgage market as a public-private partnership with the amount of public support to keep mortgage rates low to be determined by the Obama Administration. His vision is that the GSEs will not incur the interest rate risk of holding a portfolio of mortgages. They would be limited to warehousing mortgages in preparation for securitizations. The GSEs primary function would be to insure credit risk. Limiting credit risk is key to keeping mortgage interest rates low.
Paulson appears to favor one of two models. The first would only partially guarantee MBS credit risk, forcing the private sector to still evaluate credit risk. The second would turn the GSEs into heavily regulated utilities with 100% government guarantee against credit risk.
