What IMF thinks about Fannie Mae and Freddie Mac rescue

"We welcome Secretary Paulson's announcement of decisive action through a four-part program to remedy the difficult financial situation of Fannie Mae and Freddie Mac. These institutions are central to the U.S. mortgage and housing markets. This action will help support these markets and, by extension, the economic and financial outlook.

"While we are still studying the details of the plan, a key feature is the provision of explicit Treasury support of their regular business activities. This is expected to allow a modest and temporary increase in the portfolios of these institutions over the next 15 months that will support the wider availability of mortgage financing. At the same time, protection has been built in to limit moral hazard. The management of the institutions is being replaced and Treasury injections will be senior to other shareholders who have already faced significant losses.

"Looking further to the future, it will be important that the corporate governance of Fannie and Freddie is fundamentally restructured, in order to facilitate competition and market discipline. As we and others have long recognized, a key difficulty has been that these privately-owned entities with some public policy objectives have used the low funding costs from a perceived implicit government guarantee to build their portfolios, thereby benefiting their shareholders. The Treasury plan allows time to build widespread consensus for important reforms to these institutions, while ensuring meanwhile market stability and support for the economic recovery."

Related;
What's the Legal Basis for the Freddie/Fannie Takeover?

Palin, on the Ongoing Financial Crisis;

Saturday in Colorado Springs, Colo., Alaska Gov. Sarah Palin said, "The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

Fannie and Freddie’s Bust and Deeply Flawed Government Bailout;

“On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.”

The stealth bailout, illustrated, in close to real time;

Yves Smith – responding to PIMCO’s Gross — noted that governments, through the increase in their central bank reserves, have been intervening to support the US financial markets for a while now. She is, of course, right.

With the help of Paul Swartz of the Council’s Center for Geoeconomic Studies, I recently was able to get the full data set on the Fed’s custodial holdings. The data goes back to the early 1980s — though the Fed’s custodial holdings of Agencies only appear in 2001, presumably when the shrinking stock of outstanding Treasury debt induced central banks to consider alternatives. The resulting charts need little commentary.

Fannie & Freddie Thoughts

Government Hypocrisy in GSE Bailout?

Better late than never, or two cheers for Hank Paulson

Deprivatization;

The fact is that Fannie Mae was originally a government agency; it was privatized in 1968, not for any good economic reason, but to move its debt off the federal balance sheet (and Freddie was created 2 years later as a competitor.) Private ownership of Fannie and Freddie never made any real sense, and was always a crisis waiting to happen.

So what we’re really seeing now is deprivatization. It’s not something like the UK government seizing the steel mills; it’s more like firing Blackwater and giving responsibility for diplomatic security back to the Marines.

Beating the Dead Horses;

In this briefing paper, I will suggest ways that Congress could gradually extricate housing policy from its dependence on the GSEs. While it may be too late to insulate taxpayers from the risks embedded in the GSEs’ current portfolios, it is possible to shrink the GSEs without significantly damaging the housing market.

Thoughts on the GSE Takeover -Mankiw;

The problem is far from over, as the future of these institutions and a large segment of the financial system is still to be determined. The worrisome part is that this future will be determined by a political system that both created the GSEs and failed to provide sufficient oversight, even when many economists suggested reform was needed. To believe that the Congress will do a good job of it would be the triumph of hope over experience.

Long-Term Capital: It’s a Short-Term Memory

As Crisis Grew, One Option Remained ;

“Today’s necessary but likely very expensive action for taxpayers is the consequence of regulatory neglect and of a broader political system’s reluctance to take on what should have been clearly seen as festering problems,” said Lawrence H. Summers,