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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: ild who wrote (26080)2/8/2005 5:36:05 PM
From: KyrosL  Read Replies (1) of 110194
 
It would be very interesting if the administration manages to explicitly eliminate the implied government backing for agency bonds.

A Fannie/Freddie failure followed by a government bailout will create a budget nightmare much worse than the S&L crisis in the eighties, right when the boomers start retiring and stressing SS, so the government has a great incentive to eliminate the implied guarantee -- especially now that foreigners own a lot of the bonds. Removal of government backing will force Fannie/Freddie to beef up their capital. This will dilute their stockholders, but it's a better alternative than bankruptcy. Perhaps it will even help deflate the housing bubble without catastrophic consequences.
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