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02/13/09 - LOM Asset Management will launch a new Euro Fixed Income Fund on February 26th, 2009 12/03/08 - LOM Securities Cayman Ltd. Receives Cayman Islands Chamber of Commerce Corporate Citizen Award 1/21/09 - LOM's Bermuda office has repaired the telephone outage, you should be able to get through without any problems
Is Paulson Wellington or Is He Napoleon!
by: David Barker, Head Trader, LOM
Good Morning!
As we discussed on Friday, the US Treasury has come to the “rescue” of Fannie Mae and Freddie Mac!
The package which is to be tabled before Congress during the coming week is significant, not only in its immediate demeanor but also in its longer term repercussions. A sketch of the bail out is characterized in brief by the following. The Treasury will be able to purchase an unlimited equity stake in the GSE’s, which changes an implicit guarantee to explicit one while shoring up their capital base. The government will also have access to federal loans via increased lines of credit for up to 18 months. Additionally, both firms will also have access to the Fed’s discount window, pledging their own paper as collateral. This is an interesting notion as the question must be asked if they can continue to issue their own bonds and then pledge them for short term liquidity needs from the Fed. Somewhat akin to being allowed to write an unlimited number of bad cheques in order to buy your groceries.
While on the surface, this has calmed markets for the near term, major risks still abound. If Paulson and Bernanke get this one wrong, they run the risk of an outright dollar collapse and a global economic meltdown of mammoth proportions. What is at stake is the “full faith and credit” of the US government and the credibility of officials ability to handle crises in general.
Some time after the Battle of Waterloo, Arthur Wellesley, the 1st Duke of Wellington, said of the engagement, “It was a damned close run thing!” And so it is with Fannie Mae and Freddie Mac, “It will be a damned close run thing”!
As we discussed on Friday, the US Treasury has come to the “rescue” of Fannie Mae and Freddie Mac!
The package which is to be tabled before Congress during the coming week is significant, not only in its immediate demeanor but also in its longer term repercussions. A sketch of the bail out is characterized in brief by the following. The Treasury will be able to purchase an unlimited equity stake in the GSE’s, which changes an implicit guarantee to explicit one while shoring up their capital base. The government will also have access to federal loans via increased lines of credit for up to 18 months. Additionally, both firms will also have access to the Fed’s discount window, pledging their own paper as collateral. This is an interesting notion as the question must be asked if they can continue to issue their own bonds and then pledge them for short term liquidity needs from the Fed. Somewhat akin to being allowed to write an unlimited number of bad cheques in order to buy your groceries.
While on the surface, this has calmed markets for the near term, major risks still abound. If Paulson and Bernanke get this one wrong, they run the risk of an outright dollar collapse and a global economic meltdown of mammoth proportions. What is at stake is the “full faith and credit” of the US government and the credibility of officials ability to handle crises in general.
Some time after the Battle of Waterloo, Arthur Wellesley, the 1st Duke of Wellington, said of the engagement, “It was a damned close run thing!” And so it is with Fannie Mae and Freddie Mac, “It will be a damned close run thing”!
