A Few More Thoughts on FRE, FNM Bailouts

One thing that I liked about the FNM and FRE bailouts is that the Fed set the precedent that in the inevitable future bailouts, equity holders will be wiped out. That is why while the broader financial industry rallied, in some cases very strongly, certain stocks (think Lehman and WaMu) took big hits. These firms are pegged to be the next to go and investors realized that the Fed is going to do nothing for those foolhardy enough to hold their common stock. I was surprised Merrill ended the day up though, as I would have liked to see it come down hard (I wouldn't be surprised if MER took a hit as big as 10% tomorrow, in what I foresee as a diving market). I wish I had some access to CDS quotes so that I could see what the derivative market is thinking of these firms' future.

Another thing I read on Marketwatch.com was that someone at a rating agency said a few months back that the U.S. assuming responsibility for FRE and FNM's debt may result in the U.S. debt rating being cut. Somehow I feel that political pressure will prevent that from happening...

This move will definitely help revitalize the MBS market, and I have read that the government will be refinancing mortgages with borrowers in order to reduce defaults (I am unsure whether the latter was speculation or explicit policy). Either way, I'd say homebuilders and strong financial stocks will benefit from the move. Despite this, be on the lookout for rumours having even larger effects on weaker financials than they did during the July panic selling...