The two companies underpinning much of the global capital markets' debt and derivative trading are in a world of pain, and various media outlets reported that government officials were considering several options for intervention.
So what would government relief look like, and is it really necessary?
The current thinking, according to senior mortgage executives who describe themselves in frequent contact with Fannie Mae and Freddie Mac, centers around the U.S. Treasury Department's offering some form of a guarantee to $1.5 trillion of their debt. Perhaps more important, such a guarantee would also extend to the $2.3 trillion worth of derivatives that both companies are party to in some fashion.
Another idea making the round of trading desks and hedge funds Friday includes a more "moderate" direct-investment from the Treasury of up to $10 billion for each company, perhaps in the form of buying triple-A debt securities directly from their portfolios.
The problems with this are obvious: Putting more mortgage credit risk on the taxpayer's back is likely to be politically unpopular in the short term and would only immediately benefit the company's shareholders.
