My argument against Treasury wiping out GSE preferred holders was that it would destroy investor confidence in the preferred market and any area in which the government intervened. As we have since experienced, this is exactly what has happened. Cheerleaders on the markets' sidelines have been shouting their support of government intervention, but investors have been much less sanguine. Some may argue that having a dog in the fight (I do work on a fixed income desk and own FREprZ) that I am just voicing by bias. However, I am not the only (and definitely not the most influential) critic.
The markets' aversion for anything Paulson-related should be enough proof that the government is sapping, rather than instilling, confidence in financial preferreds and common equity. However, other fixed income experts have voiced opinions similar to my own and those of many fixed income market participants. James Grant, publisher of Grant's Interest Rate Observer, has published an article in the Wall Street Journal. The following paragraphs from the article speak volumes:
"Perhaps the world has gone so far down the path of socialized finance that there's no turning back. However, the doughty remnant of capitalists should be under no illusion about the risks and opportunities they confront. They can't miss the risks. Mr. Paulson pledges that the government's bank investments will be passive and apolitical, but the record of the Depression-era Reconstruction Finance Corp. suggests that the federal government is a shareholder that can throw its weight around. Besides, would Mr. Paulson's apolitical intentions bind his successor?"
Until The government backs away from its ownership interest in the private sector, I will be fearful of a GSE-like outcome.
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