Treasury Extends Credit To GSE's; Discount Window Open
A: Treasury Secretary Paulson's statement issued minutes ago. In addition, the NY Fed has officially confirmed access to the discount window for Freddie & Fannie. Equity futures for tomorrow's open rally with DOW up 89, S&P up 12.60 as of 6:24PM.
Full text via Bloomberg:
Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.Freddie has a planned $3Bln auction set for tomorrow, and if that went badly it would have seriously disrupted the credit markets causing who knows how much pain. Clearly, something had to be done. The actions here are directly focused on restoring investor confidence, and I think both the debt markets and the equity markets will react favorably tomorrow. If it does, stock markets will rally back as financials get a bid, and the spread between FNMA and US treasury (101 bps) that I just discussed earlier today would tighten. Let's see how the markets react tomorrow.
GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.
First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.
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.
Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.
I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.
The news about access to the discount window was the rumor that led to a brief rally on Friday; which fizzled out as the fed declined to comment on the rumor. According to the WSJ.com:
The Fed's Board of Governors met Sunday in Washington and voted to grant the New York Fed authority to lend to Fannie Mae and Freddie Mac "should such lending prove necessary," the central bank said in a statement. The move would effectively give the two companies access to the Fed's discount window if necessary, providing a backstop in case the firms were to face a short-term funding crisis down the road.The moral hazard argument will be revived again around the blogosphere. The real question has to be, is this just another temporary fix that is only delaying the inevitable collapse of these enterprises? Time will tell.The Sunday move was in part designed to head off fears about Monday's auction of Freddie Mac notes, which while small, had assumed an outsized importance as a test of investor confidence. Freddie should be able to find buyers for its three- and six-month notes, market analysts said, but there is a chance that some financial institutions and investors may demand to be paid higher-then-usual yields on the notes.
Comments (5)
"(1) Open the Discount Window - This ranks as the dumbest idea ever."
Noah,
Someone has to you call you out on this. Care to readdress your comment from last Friday? I noticed you didn't even bother to touch it in this post..
"LESSON LEARNED - No way is the FED going to open the discount window to the GSE's."
Since this is the very move the Fed made today, it unfortunately shows how blatantly misguided and ignorant your statements from two days ago were. I figured you would have at least said something to follow up on them.
Lastly, your statements implied that access to the discount window would further deteriorate the Fed's balance sheet. This is not true. You're getting the various lending (swap) facilities confused with the discount window. Unlike the TSLF, PDCF, etc., there is no swapping of bad debt for good debt with the discount window.
Posted by Brian | July 14, 2008 12:16 AM
Brian - you are confusing one very big thing! I DID NOT WRITE THE DISCUSSION THAT I POSTED ON URBANDIGS YESTERDAY!!!!! Didn't you see the LINKS to the original writer at the very top and notice the other comments discussing 'this authors' statements?
The discussion yesterday was found from an author named "Northbeach2000" on the forum:
http://investorvillage.com/smbd.asp?mb=144&mn=2701&pt=msg&mid=5171271
You are commenting as if it was me that wrote the piece. I said very clearly, that I thought this was a very informative read, and one of the MAIN reasons that I put it up there was because of the reference to the spreads between FNMA paper and Treasuries! I discuss spreads here all the time as a signal of distress in the credit markets. Since FRE was about to have a 3Bln auction today, I thought that reference was very TIMELY and therefore I linked to the discussion and just put it out on this site. It contained some interesting opinions and points on how the fed and treasury work. But it was NOT ME that wrote it.
I even spent my time adding a chart so you guys can visualize the spread between between FNMA and 5 YR Yields, some 101 bps, so that we can compare it to what happens after todays trading and that auction. Opening the discount window clearly counts as unprecedented action, but these are unprecedented times. Please do NOT call me out for something that I did not write and did not come from my thinking! I would never have said that.
That is why I called it Sunday's Must Read and clearly linked out to the original poster. Call it a lone linkfest.
Posted by UrbanDigs | July 14, 2008 8:31 AM
I added a statement on top of the discussion because I guess I was not clear enough that the discussion was a link out to someone else's piece.
Posted by UrbanDigs | July 14, 2008 8:38 AM
Noah, a suggestion. Although I knew that you did not write the post yesterday I can see why some think you did.
On Mish's Global Economic Analysis site that you often link out to, he often takes another's full writings or a press release and then adds 'MY COMMENT' into it so he can break it down and provide his opinion on the parts that he either agrees or dis agrees with.
I think you could do something similar and offer your opinions on the different aspects of a conversation like you published yesterday.
Just my two cents, keep up the good work!
Posted by Anonymous | July 14, 2008 8:57 AM
Noah,
My mistake, please accept my apologies.
I will forward my comments to the appropriate author, "northbeachfl2000" at IV.
Also, since when did anonymous and incorrect pundits from message forums become apt quotable material?
Posted by Brian | July 15, 2008 2:25 PM