http://www.247wallst.com/2008/03/fannie-mae-fn-1.html
he idea behind the new plan has plenty of benefit for an Administration that wants to being some calm to the markets. but it only addresses half of the problem. Fannie Mae and Freddie Mac are losing billions of dollars because of home foreclosures. While they may be able to put more capital into the market, there is nothing in place to keep them solvent if their red ink keeps piling up. Solving a piece of the trouble does not do much good, at least longer-term. The two companies cannot do help rescue the mortgage markets if their own financial status begins to collapse.
Here’s “the other thing” —
Say that fannie and freddy buy another $300Bil to the mortgage market. Banks are sitting on cash and cutting down on their lending. The brokerage firm’s are trying to stay in net capital compliance and are not adding inventory subject to haircuts. Institutional buyers are like wise trying to avoid taking losses or investing in stuff that they are not dead CERTAIN they will see a return on. Loans that the agencies buy at this point may end up being in inventory for good long while.
Get used to hearing variations on the word “liquidity” and “liquid” over the next few months. There is next issue, and it was obvious to anyone that noticed the latest round of muni bond auction failures. No one wants to buy debt right now, except at ridiculous discounts, and potential sellers are’nt of a mind to take realized losses on a fire sale. Nice catch 22.