The FT has reported:
Fears about the financial system grew on Monday as money market liquidity tightened and sharp falls in the share prices of mortgage financiers Fannie Mae and Freddie Mac led the US stock market lower.
Fannie’s and Freddie’s shares lost 22 per cent and 25 per cent, respectively, after an article in Barron’s suggested that the US government was considering recapitalising the companies on terms that would all but wipe out existing shareholders.
The concerns about Fannie and Freddie also spread to their debt, which fell in price. This threatened to push interest rates on mortgages backed by the two firms higher and put further pressure on the battered housing market.
Let’s be clear: the market behaves like this. It is wholly irrational, and that irrational is now compounded by issues such as fair value accounting which compounds any rumour mongering of this sort by making balance sheets seem weaker still by requiring that all holders of Fannie Mae and Freddie Mac debt down still further, so compounding the losses in a downward spiral.
It will require real intervention in the real markets, that is the mortgage market, to stop this.
Time to do it guys. Now.
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