Friday, August 22, 2008

The Law of Unintended Consequences

Freddie and Fannie are now learning the law of unintended consequences. The recent legislation by Congress to backstop these government sponsored enterprises is now interfering with their ability to raise money in the private markets. After all, who would be foolish enough to provide them with more capital when the government now has the right to step in and wipe out stockholders?
Freddie Hunts for Cash - WSJ.com:
"But that effort is running up against what may be an insurmountable hurdle: Many investors fear any money they invest now in Freddie or its main rival, Fannie Mae, will be lost later if the U.S. Treasury bails out the companies through a purchase of equity in them. Investors believe such a purchase would likely involve terms that would wipe out the value of previously issued shares."
Moody's saw fit to pile on this morning too:
Moody's cut the firms' preferred stock ratings to Baa3 from A1 and their bank financial strength ratings to D+ from B-.

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