The debate continues over whether or not to save Freddie and Fannie. Although the GSEs should not continue in their present forms, allowing them to falter, or worse, fail outright would do more damage to the economy and place a larger burden on taxpayers in the way of a Resolution Trust-like recovery. The S&L bailout added over $100 billion to the Federal debt.
Permitting the GSEs to default on debt and halt dividend payments would be a breach of investor trust. Allowing investors to be wiped out would be like permitting Titanic passengers permitted because authorities permitted (or ordered) the White Star line to have its ships traverse the ice fields. What needs to be done is to rescue the agencies, protect investors and change how the GSEs do business in the future.
S&P's moving to a negative watch on the GSE subordinated debt and preferreds due to "ambiguity" in the rescue plan appears to be nothing more than a push to have regulators address the subject.
Disclosure: I purchased FREprZ on 7/10/08 and on 7/14/08.
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