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September 5, 2008

Why is FRE/FNM Being Underplayed?

Is the Freddie/Fannie bailout plan being underplayed? News late today that Treasury plans are likely to be announced imminently strikes many people, myself included, as one of the biggest financial events in modern memory, and yet it feels underplayed.

Why do I say that? Well, until recently, it was the second story on the front page of the WSJ this afternoon, and it hadn't even made the front page of the NY Times site last I looked. Marketplace on NPR, which I listen to most afternoons, shrugged it off in a 15-second drive-by comment as some late-breaking news that the market may have noticed.

Remarkable stuff. Here is the Federal Government backstopping a massive financial services organization; okay, two of them; okay, the whole frickin' financial services industry plus the stock market, with China and the rest of the world watching nervously, and it's being treated as just another day in those nutty ol' markets.

But it isn't just another day in the markets. This is set to be epochal, a true "Where were you when..." moment, a before/after sort of of thing. You can't make these kinds of massive financial commitments -- more than a trillion dollars, at least in notional terms -- with so many contingencies, without imagining the kinds of consequences, financial and political, that come with it. After all, the current U.S. administration desperately wanted to punt this past November elections, and it now seems clear that it can't.

The underlined point in the prior paragraph is important to understand. As much as the Treasury and the Bush Administration didn't want to get saddled with this bailout baggage at all, put that to the umpteenth power and you'll get how desperate they were to move this past election day in November. Bush, Paulson, et al., wanted it to be the next Administration's problem, not theirs; and they didn't want it to be fodder in the current electoral cycle. They failed on both counts, which tells you fast and out-of-control this apple cart is.

So, how much will the total liability be? Any upside will be sold hard, but will there ever be a chance to exercise whatever convertible paper Treasury (i.e., you and me) end up holding? Where does it go from here, and who else -- I'm looking at you Wachovia and you Washington Mutual -- is deemed too big to fail? What happens to the dollar with the Fed working overtime to print money? What happens to treasuries? To the dollar? Inflation? Stay tuned.

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