Come Together

The media, which couldn't do enough to bury the GSEs a few weeks ago, can't publish stories about why equity and preferred investors may not be wiped out fast enough. Even Dow Jones, which had been actively trying to implement a self-fulfilling prophecy to wipe out GSE investors, has published articles which accurately detail the dangers of wiping out GSE investors.

Wiping out GSE preferreds would cripple banks. Banks own GSE preferreds because they only need to take a 20% capital charge versus 100% for corporate fixed income investments. Banks can also take advantage of the 70% dividend received deduction feature found with traditional preferred equities. Imagine the reaction of Ben Bernanke and FDIC Bair if banks were forced into failure by wiping out preferred holders to meet some moral criteria and to save a paltry $2 billion?

Would the exception of some wavering earlier this week out of fear that the self-fulfilling may come true, I had the GSE situation pegged correctly. This has led to some sour grapes among my peers and, even, some colleagues. To these people I say: Get a clue. All the analytical training in the world and all the nuance language is now substitute for in the trenches Wall Street experience and common sense!