The [government] should also buy debt from Freddie Mac and Fannie Mae, because that debt still trades at a risk premium relative to Treasuries, even though taxpayers are already on the hook for it.
the Federal Reserve, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.
There is also limited additional risk for the federal government from the Fed buying that $600 billion in debt from the three firms, since the government is already on the hook for losses those firms suffer on the loans they back.
READER COMMENTS
Ironman
Nov 25 2008 at 4:02pm
You get the most awesome prize ever, Arnold! Whenever you run into anybody at the Fed, you get to hold your hands out at them as if you’re holding a couple of marionette controllers and say “Dance, puppet, dance!”
Phil Birnbaum
Nov 25 2008 at 4:59pm
If the securities are fully backed by the Federal government, then why is there a risk premium on them?
dearieme
Nov 25 2008 at 6:02pm
If this amateur may guess, Phil – perhaps because someone wondering about how exactly the US government will default on its debt might conclude that it might treat different categories of debt differently, with Agency debt being treated more harshly than Treasuries.
aaron
Nov 25 2008 at 6:03pm
Did you buy debt from fanny and freddy yesterday? If so, then you get a prize.
Kit
Nov 25 2008 at 6:06pm
@Phil Birnbaum
If the s%$t really hits the fan the Federal government will renege on the GSE debt commitment. That is why it carries a higher risk.
Marc
Nov 25 2008 at 7:51pm
Now I’m starting to understand the logic behind Milo Minderbinder’s syndicate and their egg business in Catch-22. Apparently “the business of America” *is* business.
guthrie
Nov 26 2008 at 12:02pm
That’s great Ironman! LOL! You can just see some Fed worker walking down Constitution ave, suddenly accosted by Arnold, fingers splayed!
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