In the past few days, Hank Paulson’s $700 billion trash asset removal plan has quietly transformed into a more sensible $700 billion equity injection plan. But don’t think for a minute that Hank’s given up on buying up those crap assets. Now, he’s just going to be doing it quietly, through Fannie and Freddie, which have just been ordered to buy $40 billion of garbage a month:
Bloomberg: Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.
Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.
Let’s assume that Hank keeps using Fannie and Freddie as dumpsters for a year. That’s $500 billion in crap asset removal right there–far more than the $350 billion Congress has approved under TARP.
This plan is clever on a number of fronts:
- The Treasury now has significantly increased the size of its bailout funds: Add the $700 billion approved under TARP to the $200 billion approved in the Fannie and Freddie bailouts, and you’ve got $900 billion.
- Fannie and Freddie can intentionally overpay for crap assets without getting the scrutiny that Hank would have if he’d done this under the TARP plan. Taxpayers will still be on the hook, but this time they won’t know about it. And if Fannie and Freddie overpay for the assets, this will help recapitalize the banks.
- Artificial demand from Fannie and Freddie will artificially boost the prices of crap assets, thus slowing bank writedowns. Unfortunately, it won’t fix the banks. It will just allow them to remain in denial for a while longer.
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