Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Brighter Side of Bailout


First step: Extracting "Franron" from the for-profit business.


After reading everything I could regarding the Treasury's plan to deal with Franron (i.e. Fannie Mae (FNM) and Freddie Mac (FRE)), and after thinking about it all weekend, I came to the conclusion that not much has really changed. (However, I knew that stock bulls would treat the plan as some sort of cure-all, which is how they respond to just about every piece of news.)

So I decided to bounce my conclusion off one of the smartest guys I know, who happens to enjoy a pretty good vantage point on Wall Street (and no, this isn't the Lord of Dark Matter). In essence, he agreed with me, saying that Franron was basically in run-off mode, with the new management being nothing but caretakers.

As for the notion that Wall Street would somehow fill in the mortgage-underwriting gap, he described that as "idiotic," because Wall Street has neither the qualified people, the capital nor the appetite for risk necessary for such a project. Thus, the bidder for 80% of U.S. mortgages just went out of business - without a backup.

When you say it that way, how could the news possibly be construed as bullish? My favorite of his comments was this: He said the plan meant that the world's largest SIV was being put back on the government's balance sheet. And, as he noted, there's one more SIV to deal with: The FDIC.

Is oil the next bubble?
Minyanville's Buzz and Banter -14 day FREE Trial

A Treasury Thumbs-Up

Turning to the plan itself, I won't bother delving into details, since they'll be covered ad nauseam in many places. But I would like to share my belief -- and this may shock some folks -- that Hank Paulson has actually crafted a pretty good plan, given the bad hand that he was dealt. (What future administrations do to potentially mess it up is beyond his control.)

We've all known for a long time that the government would stand behind Fanron/Fredron. And, in this particular case, Paulson's plan in fact comes with some pain. When you compare this (inevitable) bailout to what Bernanke pulled with the JPMorgan (JPM)/ Bear Stearns merger (using the Fed's balance sheet), you can see that it's far more palatable.

I especially like the fact that the plan will eventually reduce the size of the GSEs' balance sheets in a dramatic way. In sum, the Treasury took a harder and more sensible tack than I'd feared it would. (I'm sure some people will disagree, but that's how I see it.)

However, this isn't good news for the economy. It's only the avoidance of more bad news, such that future problems at Fannie and Freddie will be less likely to freeze the financial system.

< Previous
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos