Fate Accompli

Story Highlights:

• Over the weekend, Fannie Mae and Freddie Mac were placed in a government-operated conservatorship.
• Many will form opinions on whether this was the right or wrong move, but the bailout isn't very big in the scope of things.
• The takeover could go a long way to calm a very important corner of capital markets, but there's still risk.

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For months, the fates of Fannie and Freddie seemed to swing back and forth between "bailout" and "no bailout." Teasers like Paulson's blank check and a Congressional rescue plan heightened this uncertainty. But now, the federal takeover is a fait accompli: Over the weekend, Fannie Mae and Freddie Mac were placed in a government-operated conservatorship.

Many expected this move, but few were sure about the timing or the details. With that uncertainty out of the way, another comes in its wake: What now? Pundits are already gathering steam formulating their various opinions. Some opine Treasury Secretary Paulson should have gone further in his actions. Others see the move as a bad deal for America.

But a bit of perspective shows that in the scope of our $11 trillion dollar US mortgage market, the bailout isn't very big (a pledge of up to $200 billion), nor will it steer Fannie and Freddie in a vastly different direction. For now at least, Fannie and Freddie will continue to serve their business purposes (albeit with different management). The takeover doesn't eliminate any debt obligations or otherwise affect current mortgage borrowers. Furthermore, because Fannie and Freddie mainly handle conforming mortgages, the takeover is unlikely to directly affect the subprime problems or burden taxpayers with excessive losses tied to home loans.

What the move does do is to quell the uncertainties and speculation surrounding a bailout. Moreover, it's hoped to restore confidence in the shaken mortgage market. The takeover transforms the implicit government backing of Fannie- and Freddie-issued debt into an explicit guarantee—providing great reassurance to owners of agency-issued debt. The move also ensures conforming mortgages will remain widely available to new borrowers and contains other Treasury measures to add liquidity to the mortgage market. The takeover could go a long way to calm a very important corner of capital markets.

That said, there's still risk. Shareholders of the two agencies have obviously lost out. The long-term, structural fate of Fannie and Freddie remains unknown until post-elections. And perhaps some unintended, negative consequence tied to government intervention might arise. Now isn't a time to mull over what could or should have been, but to be watchful of what happens next. In our view, we anticipate the takeover will add stability and certainty to the US mortgage market. Ultimately, the market will let us know if the fait accompli was really just folie accompli.