TPS Posted September 13, 2008 Author Posted September 13, 2008 Sorry, Tom was correct. By saying "mortgage guarantors" he meant (I hope) Fannie/Freddie as they're the ones on the hook for the repayment of the bonds they sell to investors. Fannie/Freddie debt is fungible whether it's their corporate debt or whether it's a senior guarantee of a series of mortgages that they packages and sold. As a bond holder you're indifferent, as long as you're in the same creditor class. The big issue that some people (WSJ) raised is that Treasury is guaranteeing Fan/Fred subordinated debt in addition to the senior debt, without asking the sub debt holders for a haircut. [Edit] Even after your edit to clarify, as long as Fan/Fred corporate debt and their guarantees of mortgage-backed securities are in the same creditor class, it's the same thing. In the vast majority of cases, a guarantee is the same as the actual debt obligation, unless the bankruptcy court invalidates the guarantee. In this case, I can't see how a bankruptcy court would invalidate the mortgage guarantees. As a GSE, the government has guaranteed the debt, so they have to step in and bail out. The argument made in the aritcle is that it was the foreign holders of the debt that forced the administration's hand in this bailout because they (foreigners) weren't going to continue to purchase new issues.
GG Posted September 13, 2008 Posted September 13, 2008 As a GSE, the government has guaranteed the debt, so they have to step in and bail out. The argument made in the aritcle is that it was the foreign holders of the debt that forced the administration's hand in this bailout because they (foreigners) weren't going to continue to purchase new issues. If foreigners threatened to stop buying GSE debt, the Fed acted not out of fear of the dollar getting dumped, but cutting off the last supply of liquidity to the housing market. Foreigners probably said no to more GSE debt because they got tired of the declining values of those bonds. It would be economic suicide for other central banks to start dumping the dollar now.
The Warden Posted September 13, 2008 Posted September 13, 2008 If foreigners threatened to stop buying GSE debt, the Fed acted not out of fear of the dollar getting dumped, but cutting off the last supply of liquidity to the housing market. Foreigners probably said no to more GSE debt because they got tired of the declining values of those bonds. It would be economic suicide for other central banks to start dumping the dollar now. What always gets lost in this discussion is the value of the asset. The asset, buildings (either commercial, industrial, or residential) never goes away until obsolence or barring a significant disaster. The value of said assets may fluctuate, but it is still a hard good - and theerfore somewhat permanent. I thoroughly believe in the free market - supply & demand and hard assets (structues of any sort ) matter How they are financed can & does lead to the current mess (like it has never happened before)
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