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« ETF Update: Hope for Consumer Stocks? | Main | Candidates and the Credit Crisis »

August 26, 2008


Lineu Vargas

Hi Jeff,

Thank you very much for your answer. But perhaps I haven't made myself very clear: How would treasury go about eliminating the common shareholders against their will (lots of floated solutions seem to assume this)? Until FRE and FNM actually go bankrupt (or OFHEO declares them so), they hold the power to refuse a bailout. Presumably they would be indifferent between running the company into the ground (and the housing market with them) and accepting any offer that leaves them with zero. As any bargaining game (Nash comes to mind), the ultimate solution depends on the relative bargaining weights that can be attributed to the parties. My view is that the value of the common stock depends primarily on those and NOT on any "fundamental" considerations (who know what the fundaments are in any case) or any non-credible plans (as any that would completely dilute the shareholders seems to be). Any thoughts on this?


Lineu - You are correct in noting that FRE and FNM still meet the official standard of capital adequacy. If the Treasury does intervene, the nature of its action will be important. There are various plans that would seriously dilute or eliminate common shareholders. As we have noted, the market has already taken care of that.



Lineu Vargas

Disclosure: My fund is long FNM and FRE.

First things first: I am really thankful for the effort you put in your blog, presenting a view that is sorely missing in the "commentariat", that of the government official or the elected representative.
Actually, I have a question for you: How would the Executive actually go about wiping out the common stock or the preferred ? I mean, what is the legal procedure to do that. There is nothing in the recent Housing Bill that grants the Executive the unilateral power to do that, on the contrary it states quite clearly that any government purchase of FNM, FRE securities has to occur with the mutual aggrement of the FRE, FNM boards and Treasury. In a very fundamental sense, until FRE and FNM aren't bankrupt, the Treasury has very little power, because the common stock has veto power. That's one of the good things about the common after all.


Every-time that Feller with the beard opens his mouth it costs me a fortune.


Calls of McCarthyism do more to squelch dissent than opinions of those involved.

Mike C

"Comments are welcome."


I am unclear on what exactly you mean when you say that trading in financial markets "has been dictating public policy", that Wall Street has "voted" on Treasury policy, and that Wall Street opinion may "force" the final decision?

What are you advocating? IMO, individuals, pundits, Street analysts, should be free to advocate whatever view, analysis, opinion they so desire, and market participants should be free to buy, sell, or short based on the conclusions they come to.

Just my opinion, but I think Zac hits it exactly with:

"We're in an era of financial McCarthyism, where anyone who raises questions about companies is a "rumormonger" or a "short seller." That's dangerous for the market in the long run because it squelches dissent and contributes to speculative bubbles."

There is an unstated premise that government and government officials SHOULD be quite involved in the markets and economy. Not everyone shares that view, and those who do not should be free to advocate to that end.

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