On Jul 12, 2008, at 10:52 AM, Shane Taylor wrote:
> Nouriel Roubini argues that as Fannie Mae and Freddie
> Mac would be insolvent as private institutions, they
> should be forced into the equivalent of Chapter 11
> bankruptcy. Force a haircut from bondholders, not a
> bailout from taxpayers. The creditors are paid a
> rising risk premium, so they deserve to bear the risk.
A problem with this is that, as he concedes, the GSEs' bonds were perceived as essentially obligations of the U.S. Treasury. He worries at the end of the excerpt about the effects of socializing their losses on the U.S.'s Aaa status, but what would the effect be of a 5% haircut on Treasury-equivalents? That would be a very risky course for a big debtor to take.
Doug