At the end of an atrocious day I am going to be contrarian.
The Frannie bailout is working.
No – it can’t save Lehman.
And companies that have to roll over billions of dollars of debt in the next few years are all problematic.
But then there was no reason why injection of money into Frannie should have solved Lehman’s problems. Lehman has to find its own money or fail or be bailed out (at effectively total loss to shareholders).
All a Frannie bailout could do is make conventional mortgages – the stuff that Frannie issued and insured – cheaper. Any other claim for the Frannie bailout is a stretch.
And on the limited thing that it is doing the evidence so far looks good. Here is the yield of Fannie Mae perfect coupons – note the spectacular drop in the last few days.
Note the 5.16% current yield versus the approximately 6% this measure seemd stuck at before the legislation and the 5.7ish numbers before the weekend.
The 1.7 billion Pimco one-day gain is the same story.
Frannie Mortgages have got much cheaper in a few days.
That should flow through to retail mortgage rates far more effectively than any of the recent Fed cuts. It probably won't solve the housing problems but it will ameliorate them. Any other a-priori claim for the bailout was optimism over analysis. And you can claim the bailout is a failure by setting up and demolishing a straw man. But an objective look says this bailout is by-and-large succeeding at its modest aims.