Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: DuckTapeSunroof who wrote (31205)	1/8/2009 5:07:58 PM
From: DuckTapeSunroof	Read Replies (1) \| Respond to of 71588

Obama Must Tackle Fannie, Freddie’s Federal Ties (Update1) By Dawn Kopecki bloomberg.com Jan. 8 (Bloomberg) -- President-elect Barack Obama has little time to decide the fate of Fannie Mae and Freddie Mac as bank regulators warn of the drag the government-seized mortgage- finance companies are having on the U.S. economy. Federal regulators are concerned that if the new Obama administration doesn’t act quickly enough it may miss the opportunity to resolve the ambiguous government backing of Fannie and Freddie, an arrangement that has scared away many foreign investors the companies rely on to fund new loans. Throwing the full faith and credit of the U.S. behind Fannie and Freddie may almost double the $5.8 trillion in federal debt, pushing Treasury rates higher, raising the government’s borrowing costs, and boosting inflation. Regulators may be ready to pay that price, with some pushing for an explicit guarantee for the companies and others seeing the need for nationalization. By allowing “structural ambiguities to persist for too long, U.S. policy makers have created an untenable situation,” Treasury Secretary Henry Paulson told the Washington Economic Club yesterday. Paulson, in one of his last public addresses before leaving office, joined Federal Reserve Chairman Ben S. Bernanke in stating a need for a permanent government role in mortgage financing. Neither has said definitively what role Fannie and Freddie should have, though Paulson suggested replacing the companies with utility-like businesses that would guarantee mortgages without maintaining investment portfolios. Public or Private “A public utility-like mortgage credit guarantor could be the best way to resolve the inherent conflict between public purpose and private gain,” Paulson said in his speech yesterday. Washington-based Fannie and McLean, Virginia-based Freddie are the largest U.S. mortgage-finance companies, owning or guaranteeing more than 40 percent of the $12 trillion in U.S. residential mortgage debt. The companies have $4.2 trillion in home-loan securities and $1.7 trillion in unsecured corporate bonds outstanding, according to data compiled by Bloomberg. Paulson and Federal Housing Finance Agency Director James Lockhart placed Fannie and Freddie in a government-operated conservatorship on Sept. 6 after their losses threatened to further disrupt the housing market. The U.S. agreed to inject as much as $200 billion of capital to keep the companies solvent. Since then the Fed, in an effort to lower mortgage rates, committed to buy as much as $100 billion of the companies’ debt and $500 billion of their mortgage bonds. That’s on top of a $700 billion rescue package for the financial services industry and other programs to help automakers and spur consumer lending. AAA or Bust “Today, Fannie Mae and Freddie Mac are in a temporary form that, while stable, cannot efficiently serve their Congressionally chartered mission and protect the taxpayers’ investment over the long-term,” Paulson said yesterday. “We took the right actions to meet a specific need at a specific time.” Standard & Poor’s said Sept. 2 that a significant and swift increase in the U.S. debt burden, including costs to save Fannie and Freddie, could threaten the government’s AAA credit rating. While the likelihood of a downgrade is low, the glut of public spending may eventually erode the government’s top-tier credit status if policy makers can’t bring the deficit under control by 2011, said Steve Hess, the lead U.S. government debt analyst at Moody’s Investors Service in New York. “The current credit crisis, plus the recession, plus the stimulus package that’s coming up, put them all together and you’re going to see a considerable deterioration with the U.S. balance sheet,” Hess said, estimating the budget deficit will be $1 trillion this fiscal year and close to that much next year. Eventual Cost The Congressional Budget Office said the deficit will more than double this year to at least $1.18 trillion, driven up by the federal bailouts. Next year’s shortfall will reach at least $703 billion, the nonpartisan agency said in a biannual report yesterday. Those estimates don’t include the cost of Obama’s pending economic stimulus package, which may add about $775 billion to the total. The president-elect, who takes office on Jan. 20, proposed a two-year stimulus proposal in a speech today that includes infrastructure spending aimed at creating or saving 3 million jobs and about $300 billion in tax cuts for individuals and businesses. The Bush administration decided not to count Fannie and Freddie’s liabilities as obligations in its budget estimates. Adding to Balance Sheet Former Congressional Budget Office Director Peter Orszag, Obama’s pick to head the White House budget office, in September advocated adding the debt to the balance sheet. Though much of the companies’ unsecured debt is likely to be counted, Orszag said at a Sept. 9 press briefing that their mortgage securities won’t necessarily translate into the same amount of federal debt because loans and other assets back those liabilities. Orszag wasn’t immediately available to comment yesterday. Though the accounting change may hurt Treasuries, federal borrowing costs ended last year near record lows. Two-year notes dropped to 0.6044 percent on Dec. 17, while the benchmark 10- year note touched an all-time low of 2.0352 percent on Dec. 18. Yields on 10-year notes rose yesterday two basis points, or 0.02 percentage point, to 2.48 percent, according to BGCantor Market Data. Two-year yields rose four basis points to 0.80 percent. “The federal government has to make up its mind by the middle of this year as to what the final outcome will be for Fannie and Freddie,” said Ira Jersey, a U.S. interest rate strategist at Credit Suisse. “Because the closer they get to the end of the year, there’s going to be more of an issue of whether they can roll over their debt.” To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net. Last Updated: January 8, 2009 13:37 EST

To: DuckTapeSunroof who wrote (31205)	1/8/2009 5:32:19 PM
From: TimF	Read Replies (1) \| Respond to of 71588

Considering how little treasuries have been paying I'm not surprised that they are less desireable for China. To the extent that reduced demand from China is part of an upcoming reduced demand from the rest of the world, than the rate will go back up, which should help increase demand again. Beyond this effect, I would not be surprised to see China looking for a bit more diversity in its holdings, but it likely will remain an enormous holder of US federal government debt for some time.