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Capital Markets

Bond Outlook September 10th

This week we dare consider the moral implications of the GSE bailout, as well as reviewing the financial impact. Pity the next generation as they will pay the price.

Bond Outlook [by bridport & cie, September 10th 2008]

We wish to take a somewhat different tack this week, calling our readers’ attention to the moral aspects of the GSE saga. The bailout, or nationalisation under another name (“conservatorship”) of Fannie Mae and Freddie Mac is the biggest in the history of capitalism. A transfer of assets and liabilities in the order of USD 5 trillion are being transferred from private to government control, while the Treasury's plan commits the Federal government to provide up to USD 100 billion for each firm's rescue, plus unlimited liquidity at least to the end of the year. The initial reaction of the financial markets was that the US Administration has done the right thing, had to act to avoid a collapse of the mortgage market and has protected the entire financial system in the USA and elsewhere. As the days go by, however, the real and very negative implications of the takeover are gradually sinking in.

 

The first question is how the situation could have reached this point. Problems over GSE financial reporting arose years ago, not just months.

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