Three questions about Fannie and Freddie
1. Does the math of the bailout add up? If it totals, according to the New York Times, about $300 billion, that's perhaps four times Fannie and Freddie's total assets. Fannie is leveraged 70-to-1, Freddie somewhat less, although it's still obscene. So is $300 billion, some of it obtained through the discount window, going to be nearly enough? (As one wag put it over the weekend: "I'd like to line up at the discount window so I could borrow at 2.25%. I could put it in stocks with a 5-6% yield.")
2. Anyone else find it curious that the dollar is up and gold is down today? One might expect the opposite would be the case now that the wraps have come off the bailout package and we know more inflation is baked into the cake. On Friday, gold zoomed up and the dollar tumbled as the worries over Fannie and Freddie spread… and tellingly, traders were not buying Treasuries as the proverbial "flight to safety." So what gives today (at least as of this writing)? Is it a classic case of buy the rumor, sell the news? (Update: Trends have reversed from this morning. Bloomberg attributes gold's rise today to Iran tensions, about which I have much more here.)
3. Just who planted this exquisite line of propaganda with the Wall Street Journal? This was the lead sentence to the lead article: "As the crisis worsens for mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson is insisting that any potential government rescue plan not benefit the companies' shareholders…" Yeah, that Hank Paulson, Mr. Tough Guy.
This sort of hair-splitting no doubt gives Kudlow and Cavuto an excuse to tut-tut any guests who might say dare to say a discouraging word about the bailout ("Whaddya mean bailout, the shareholders are gonna get clobbered!"), but as was the case with Bear Stearns, the issue is not whether the shareholders hang. It's whether the creditors hang. Paulson and Bernanke don't care a whit about the multitudes who own a piece of Freddie because Bill Miller thought it was a great value play. But for the matrix of institutions whose derivatives are tied up in God-knows what sort of crazy paper that's connected to Fannie and Freddie, well, as Jim Cramer would put it, the Fed has their back.
Sorry, no bailout or discount window for you. You might consider these protective measures instead.