US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion (£7.5 billion) of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.Yves Smith is not impressed:
...
The capital-injection plan is said to be high on a list of options being considered by regulators as a means of restoring confidence in the lenders. The move would protect the American housing market, but punish shareholders in both companies.
Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders.
And let us not kid ourselves: this is a fig leaf, not a solution. This move would acknowledge that the GSEs are undercapitlized without giving them enough equity to function as independent, self-supporting financial institutions. It affirms the implicit guarantee without formalizing it.I'm not as hostile to Paulson's plan as Smith. She thinks a $15 billion capital injection isn't enough to adequately capitalize the GSEs, and that the plan therefore amounts to a half-measure. I think the questions about Fannie and Freddie's solvency are a bit over-blown -- as Richard Green noted, the last real news about Freddie Mac came out more than 2 weeks ago, and it wasn't that bad. If Paulson and Bernanke (who I assume is intimately involved in the planning) are satisfied that the GSEs aren't dangerously undercapitalized, then what they need to do now is calm the markets at the lowest cost. I don't know if that's the aim, but that's my guess.
Is $15 billion enough to calm the markets? I don't know that either, but I'd say it probably is. We shall soon see.
Posts
