Monday, August 25, 2008

The Secret to Survival for Freddie and Fannie....

...more debt, higher leverage.

Treasury Secretary Paulson, perhaps unwittingly, has created a a life saving escape hatch for Freddie and Fannie.

The Treasury has made it clear that it will guarantee Freddie and Fannie debt. It has made it clear, it will not back up common stock of the two companies, and the Treasury has been hazy as to where it stands on preferred.

Thus, the market has no interest in common stock or preferred, BUT because of the Treasury guarantee on Freddie and Fannie debt, the market will buy their debt.

This was proven by today's successful sale of $2 billion of short-term debt by Freddie. It sold $1 billion each in three- and six-month bills,at a yield of 2.58% Though it was a bit expensive since this was about 90 basis points more than similar-maturity U.S. Treasuries.

Nevertheless, with the debt window open, Freddie and Fannie can survive. The big question remains will they be willing to test the markets willingness to buy long term debt and thus raise more permanent money.

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