Tuesday, March 18, 2008

fnm, nly and fre and the market

great day - short covering? surely some, but higher prices are higher prices, right? fnm and fre being up i think is so very important.

part of what broke bsc was that it was stuck with a huge amount of agency paper -- government-sponsored enterprise paper -- that fell in value vs. treasuries much more than ever before. that was hard to hedge and was causing runs for everything from bsc to nly. with fre and fnm going higher, there is a chance they can refinance and then be able to buy their own bonds back, which would be gigantic.

many are skeptical about fnm and fre, but there was a little-noticed article this morning in the journal about how the white house might relent here. ofheo, the regulator, has been saying they can't do anything with their own bonds even though ofheo acknowledges there is a surplus in fnm's balance sheet of 10 billion. that can be levered up to $100 billion to buy paper at a gain for fnm. this would be huge for fnm and raise the marks at all investment firms.

it also just seems like some deal's been reached that will make the implicit support for gse paper more explicit - is that one reason nly is going higher?

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