[cougjunkie]

Originally Posted by Cali Coug

The government had to step in if they cared at all about market stability. Fannie and Freddie have issued over $5 TRILLION in agency paper. That is a HUGE amount of cash, and the government can't afford for Fannie and Freddie to look like they can't cover the paper. If they did, the dollar would be weakened tremendously, markets would seize up, money supply would tighten, etc. It would have been a disaster. I also think the government structured the "takeover" very well. The deal created a new class of preferred stock that will be issued to the government. In effect, by becoming a preferred stockholder, the government told the markets that the paper will be covered no matter what. In a liquidation, creditors are paid off first, followed by preferred stockholders, followed by common stockholders. By becoming a preferred stockholder, the government preserved the interests of the debtholders first, and we know the government isn't going to allow a default for the debtholders when it means the preferred stockholders (i.e., the government) would get nothing back.

The markets love the move so far. They have to. There was too much at risk if Fannie and Freddie went under.

I just came back from a training on this. The government also has the option to buy up to an 80% share if they would like. They have also opened a direct line to the US treasury for Fannie and Freddie. This has been huge for the mortgage industry and rates have dropped drastically. For those of you who have been looking to refinance you might want to call your broker today. The market is still fairly volatile but if you play it right the low 5s are a possibility.