Federal Reserve & Interest Rates

Treasury Secretary Henry Paulson has put together a rescue plan for Fannie Mae and Freddie Mac that is expected to be passed by Congress sometime next week.  He has acted quickly in making sure there isn’t a run on the company after reports surfaced last week of financial troubles for the two government sponsored agencies.

There have already been quite a few critics to Paulson’s rescue plan, some calling it a “blank” check by the government that could possibly put taxpayers on the hook for up to a trillion dollars if not more.  The two companies are involved in about 50% of the $12 trillion mortgage market so there is a ton of potential liability that the government is being exposed to.

Proponents of the plan are confident that taxpayer dollars will not be put at risk since once investors are sure of the government’s backing of the two companies.  The implicit result would be that the government would pretty much guarantee that the two companies would not be allowed to fail and would do much to bolster investor confidence in both their stock and outstanding debt.

Financial advisors have quickly moved to rate the companies’ debt as a buying opportunity as they would essentially have the backing of the U.S. government and thus having similar risks as Treasury securities yet offering higher yields.  The stock prices of two have also recovered somewhat and have led to a strong rally for financials the last two days.

This would allow the them to quickly raise large amounts of capital in a short period of time, despite the fact that based on fair value accounting rules the two companies could be categorized as insolvent.  Although they claim they aren’t having liquidity troubles currently, the housing market is steadily growing worse and that additional capital may be needed sometime soon.