LEX Ready, aim, fire. Hank Paulson used that bazooka after all. The US government’s decision to place Fannie Mae and Freddie Mac into “conservatorship” came without a specific cause – such as a failed debt refinancing – but rather a sense they were both failing to provide affordable mortgage debt while also threatening to upend the US financial system. The looming election, combined with increasing reluctance by foreign central banks to buy US mortgage-backed paper, may also have helped prompt his early intervention.
The government is using a belt and braces to hold up the show – and, most important, to get US mortgage rates down. It will recapitalise the government-sponsored enterprises by gradually buying preferred stock – a plan that will also massively dilute existing shareholders. It will lend the GSEs what they need to continue, before slowly reducing their operations from 2010. And it will buy their mortgage-backed securities directly itself. All this is bullish for credit markets. As for the future structure of the US mortgage market – that is a problem for the next guy.
