On Sunday, September 7, the US government finally announced that the two beleaguered and insolvent GSEs, Fannie Mae and Freddie Mac with a total debt of $5.3 trillion, will be placed into ‘conservatorship’ (read nationalised). The US government will immediately acquire a $1bn stake in each in the form of preferred equity with the option to expand its stake to $100bn in each company. The new preferred equity is senior to existing preferred and common shareholders, but junior to existing senior and subordinate debt holders. Creditors’ interest and principal payments are furthermore secured by a lending facility.
From the action plan announced it seems that the winners are debt holders, but preferred and common shareholders are big losers because they won’t receive any dividends, at least in the foreseeable future. Hence, sharp losses and further writedowns are expected to continue for such shareholders.
The reaction to the announcement is mixed. Some commentators argue that the plan will have a positive impact on credit markets. Others are more critical; nothing can prevent the US housing market to continue its slump and subsequent further losses in the securitisation markets.
Another concern is that the increase in government debt would start affecting the US sovereign credit rating (currently AAA). The expected rise in Treasury supply could depress bond prices if demand does not rise in line with supply.
Click on the video link below for some comments on the rescue plan.
Assessing The Plan
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