A Misreading of the Treasury Plan: Plan Won't Boost Stock Price

There's quite a bit of what we view as a misinterpretation of the Treasury announcement that it will seek Congressional approval to buy Fannie Mae and Freddie Mac stock. Many are interpreting this to suggest that the Treasury wants to go into the open market to boost the price of these stocks. See, for example, Ian Shepherdson at High Frequency Economics:

This is a package designed to forestall a full rescue; the Treasury is not buying the stock immediately, but by seeking the authority to do so it plans to make shorting the stocks potentially very risky.


Or checkout this stuff from a Yahoo! thread on Fannie Mae:

US GOV'T BUYING SHARES FORCING SHORT SQUEEZE 14-Jul-08 08:42 am The US gov't said they will buy unlimited shares of Fanny and sally. This will force a short squeeze for the shorts since all longs on the sidelines are now buying in full force.

Not in our reading of the situation. The Treasury is not asking permission to buy open market stock. It is asking for approval to buy newly issued Fannie Mae and Freddie Mac shares that will result in boosting their capital. We have seen no indication that Treasury wants to boost the share prices of Fannie and Freddie. Indeed, if the Treasury does come in to buy newly issued shares from Fannie and Freddie, we expect it to be highly dilutive for current shareholders.

A careful reading of the Treasury statement says this:

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

In other words, Paulson to current shareholders: Drop Dead.