The federal government is preparing to seize control of FNM and FRE, replace their management, wipe out common shareholders (who have already lost 90%), and explicitly guarantee their $5TR of debt. It is likely to happen over the weekend or next week.
This is according to the NYT and WSJ, which have probably received deliberate leaks from the government.
http://www.nytimes.com/2008/09/06/business/06fannie.html?hp
http://online.wsj.com/article/SB122064650145404781.html?mod=hpp_us_whats_news
The background is:
- FNM and FRE are nearly the only lenders left in the housing market. If FNM and FRE cease lending, there will effectively be no more new mortgages (or at least none at anything like current rates) meaning the housing market collapses. Not declines, as we've been seeing, but actually collapses.
- The agencies are technically near insolvent (as in, assets less than liabilities, at market values) so they have to raise new capital, probably $10-20BN each. No equity investor has been willing to inject capital into either, due to the risk of being wiped out by a subsequent govt seizure (as indeed is happening).
- FNM and FRE combined have big debt maturities this year (I think $100s of BNs), and they must continually sell new debt or default on the maturing debt. Investors are rapidly losing their appetite for buying FMN or FRE debt. Foreign govts have become big net sellers of the debt. The agencies have been managing to sell debt to private investors only through desperate arrangements like swapping new debt for old debt (i.e. no net buying).
- Foreign govts, US and foreign banks, pension funds, mutual funds, all hold $ trillions of agency debt. If FNM or FRE default, that would likely drive numerous banks to insolvency, wipe out many retirement savings, cause money market funds to break the buck
, and - worst case - trigger a buyers' strike for US Treasuries.
So, this is a crisis and the govt is resorting to desperate measures. It is not BSC, it is 10X or 100X more of a crisis than BSC. And there is no private entity big enough to step up and do what JPM did with BSC. If the govt doesn't act, it is Great Depression, Act 2.
Will be interesting to see how this develops. To say the least.
The optimistic view is that this seizure may not ultimately cost the federal govt that much - depends on how solid you think FNM and FRE-owned mortgages actually are. With the govt guaranteeing agency debt, financial institutions may be less concerned about counter party risk, thus improving liquidity.
The pessimistic view is that this could impact the credit-worthiness of the US of A itself, driving up rates on Treasuries. Rates move inverse to price, so the value of Treasuries could fall. And the only kind of debt more widely held throughout the world than agency debt, is Treasuries. Implications for the USD would be severe.