Yesterday (Sunday) Fed took over Freddie Mac and Fannie Mae! Despite being fairly expected I still think it is an extremely significant event in the history of finance. Remember, these are two central pillars in the US financial system. They have been around “forever” and they own or guarantee half of the US mortgage stock. This is not the ordinary bank rescue or the ordinary interest rate cutting. This is the end of an era. And this mother of all the moral hazard inducing events throughout history is executed by Hank Paulson, the long-time Goldman Sachs CEO! Not by a left-wing politruck-politician!
All the major stock markets rallied this morning (Sweden OMX +4.5% right now)) and there is no doubt that a lot of market participants can relax for a while (for instance one of the Swedish government owned pension funds that holds significant amounts of agency debt). On the whole, however, I am really struggling to interpret this event as a positive one. Instead, I see it as a severe symptom of just how sick the world’s financial system still is (rated FFF ?). And, remember, these agencies are only pivotal in the mortgage market (as I understand it) and not at all in the corporate debt market. Alas, this is not a bail out of the corporate sector (but for the banking system) and there are plenty of areas where future credit losses might appear. And there is probably a limit to how much the US tax payers are willing to pay to rescue the world... :)
To sum up, I am still skeptical about valuations in the markets and if I was the lead analyst with a bank I would summon my analysts and tell them to stay in defensive mood.