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Fannie, Freddie Bailout Necessary, But Not Enough

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More and more holder classes will be hurt.

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First, my apologies to all regarding Fannie Mae (FNM) and Freddie Mac (FRE) preferreds. I called it wrong. They weren't saved.

But in trying to learn from my mistakes, I would offer that regulators clearly knew who held them within the banking system and concluded that the holders -- unlike the subordinated debt -- weren't sufficiently entwined (nor the individual holdings material enough) to be significant.

I would, however, add that I think regulators are sending an important message to investors: Given the increasing size of the problem, more and more classes of security holders will be hurt. For bank investors, specifically, I would caution that the government only cares about depositors of $100,000 or less.

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Second, I think what the government did will be a positive move - just not yet. Clearly, the ultimate floor in housing prices will be higher with this weekend's actions than it would have been without them. But again, I would caution that we're still way above that floor level.

Finally, I would strongly urge Minyans to recall that the GSE asset valuation issues referenced by the regulators aren't unique to the agencies. And, as we've seen this weekend, even minor changes in value have a huge impact on capital. Leverage is great on the way up, but asset deflation is toxic.

Net, while I wish I could offer otherwise, I would describe the actions this weekend as necessary - but not sufficient.

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