Thursday, February 24, 2005

Fitch Ratings: US Government Will Support GSEs

This morning the global credit evaluation service, Fitch Ratings, held a conference call and issued a position paper titled "GSEs: Are the ‘AAA’ Ratings at Risk." While the short answer is maybe, the statement (registration req'd)makes it clear that the GSE bonds receive a high grade due to the understanding that uncle sam will guarantee them. "Senior debt ratings...include an assumption of support from the US government that would be provided in the event of severe financial stress".

It goes on to say this view is reinforced by current legislation being considered that would increase oversight rather than cut ties to the firms. Fitch also made clear that if the guarantee were removed it would damage the entire economy. "If there was a major problem in their ability to issue debt, then the government would have to step in in order to support not just the GSEs but the overall economy as well," said Fahey. "It's very similar to support that we view in the money center banks in the United States."

In other words, too big to fail. And much of the report focuses on how the failure should be handled! Together with all the hints coming out of the White House and congress about a bailout, todays announcement reinforces the suspicions that the GSEs are in trouble. Consider this: Fannie isn't providing financial statements. Massive drawdowns of Freddie and Fannie portfolios are ongoing. And new legislation that would allow a government agency to take over the firms is expected to pass.

The bond holders will be made whole; the stock holders will not. The property market could be devastated.


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