Tuesday, July 15, 2008

Saving Fannie or Gulf of Tonkin?

The plan
In his plan to save the GSE's Treasury Secretary Paulson proposed a blank check, an undefined amount of money that the government would have access to in order to assist the GSEs should assistance be needed.

Risk of the blank check
As Secretary Paulson presented this proposal to the Senate banking committee, many members were reluctant to sign on for a blank check. Senator Jim Bunning from Kentucky was one of the most outraged Senators. He promised to fight the whole thing. Perhaps some remember the Gulf of Tonkin Resolution in which the US military was given a 'blank check' in terms of endorsing a policy response to retaliate against an attack on a US ship in the Gulf of Tonkin. That check wound up jump-starting the Vietnam war. Blank checks have a checkered past.

We do not suppose any such risk exists with this literal blank check, but there are other risks to be sure. Still there is merit in Paulson's suggestion that an unlimited backing would be the most effective. Underwriting a dollar amount runs the risk that it will be too little. Paulson further argued that the check might never need be written, it may only need to be ready.

Dodd wants action
Admitting the danger of this proposal Senator Chris Dodd endorsed a plan of action, saying inaction is not an option. He hoped to get something agreed upon by the end of the week. He did not yet endorse this particular plan.

Market see, market do
As for the poor market reaction that Sen. Bunning was too quick to hoist up as a sign that the plan was bad, he is likely wrong. True, the GSE stocks did not fare well on the day as this assistance talk swirled around. Fannie's stock fell by 37%. Freddie Mac's stock fell by about the same amount. Why is this reaction not a black mark against the Treasury Secretary's plan? Mainly because the plan has not been geared to help shareholders in the first place. The plan is geared to help Fannie and Freddie conduct business not to boost the value of the stock. In the Senate meeting Paulson was asked to be sure that if any public monies went into the GSE's that the taxpayer would be protected. The Senators do not want the taxpayer to be protecting the interests of the shareholders.

Shareholders look after shareholder interests -- Shareholders may feel rightly that they are still at risk even if the assistance plan has merit. The market is not judging the efficacy of the plan. Shareholders are assessing their own risks and financial exposures. However stocks has been down severely all day and whil they did trim some losses before the close they has a relapse the Dow closed off by 92 points. The S&P was off by more in percentage terms while the NASDAQ closed higher. There doesn't seem to be much of a vote for growth there.

1 comment:


The mortgage giants are still a basket case.