Government moving to interventionist mode The Fed's were at work all weekend to ensure calm markets at the open on Monday morning after last week's sell-off in Fannie Mae and Freddie Mac stock. According to the Wall Street Journal, they even went as far as contacting large investors to ensure they show up for today's $3 billion auction of short-term Freddie Mac debt. Though many believe the current administration has shown reluctance to address the financial crisis in full force over the past year, we believe they have reluctantly been persuaded of the need to move to an interventionist policy.
Moving toward explicit G-stamp Indeed, the announcements over the weekend from the Federal Reserve and Treasury Secretary Paulson to 1) open the discount window to the GSEs, 2) expand credit lines; and, 3) perhaps take a (temporary) equity stake in Fannie and/or Freddie are a sign that what the market generally views a an implicit government stamp is now closer to becoming explicit.
Government using Swedish-style defense Since last March, when the government stepped into the Bear Stearns' situation, we've been talking about which approach the government will take in addressing the financial crisis. We framed the debate by the two extreme examples in history, the Japan style of ignoring the problem until it was too late and the Swedish model of a more direct, interventionist approach. The weekend's announcements suggest they chose the latter option, though we still believe they may continue to operate in a defensive mode (addressing problems as they crop up) instead of an offensive style of heading off problems before they happen.
Nationalization creep We do not believe that the government can completely turn their back on bond holders without the risk of sending a signal that the entire financial system has to fend for itself. We believe this is likely not a step the US government wants to take as it would put the US dollar in a precarious position. We have also been arguing that a nationalization of Fannie and Freddie may ultimately result (though in the US, it is called a more palatable 'conservatorship'). The events of this weekend were the first step in this direction, in our view.