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Hank Paulson: conflicts of interest |
The Bush administration has always been clear when it comes to the GSEs – they offer too much potential for systemic risk. This view has been at least partly borne out over the past months. Under a McCain administration, what’s left of the GSEs would likely be privatized or phased out completely. Initial ideas from Democrats such as senator Barry Frank of Massachusetts indicate a preference for a hybrid structure. That means the GSEs would be privatized. However, an entity, potentially with a state interest, would be established to help low-income families access mortgage finance. So far, the bail-out has been very much to the benefit of the GSEs’ bondholders. In the aftermath, spreads on the senior debt of both GSEs tightened by 25 to 30bp depending on maturity. The tightening trend is expected to continue. While asset manager Pimco is said to have totted up $1.7 billion in gains on its GSE bets, shareholders in Fannie and Freddie are left with pennies.
"The bailout has bought the two entities 15 to 18 months while the government takes them over," says Ajay Rajadhyaksha, head of US fixed-income strategy at Barclays Capital in New York.