The Wall Street Journal is reporting Treasury Is Close to Finalizing
Plan to Backstop Fannie, Freddie

The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter. Precise details of Treasury’s plan couldn’t be learned. The plan is expected to involve a creative use of Treasury’s new authority to make a capital injection into the beleaguered giants.

The plan includes changes to senior management at both companies, according to a person familiar with the plans. An announcement could come as early as this weekend.

On Friday, a series of high-level meetings were planned between Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the chief executives of Fannie Mae and Freddie Mac and the companies’ new regulator, the Federal Housing Finance Agency.

Treasury has been working with bankers at Morgan Stanley to use its newfound authority, granted by Congress in July, to devise a way to prop up the mortgage giants, which have been pummeled by investors in recent weeks.

After Hours Casino Still Open

Fannie Mae was up 9.7% today to $7.04 and Freddie Mac was up 3% to $5.10 on news of the bailout. Ironically, any bailout is likely to wipe out shareholders.

After hours Fannie Mae plunged below $5 and Freddie below $4 and there is still no real news. Where they finish when the after hours casino closes is anyone’s guess. Monday could be interesting as well.

I suspect Bill Gross will be smiling (see Bill Gross Wants Treasury To Buy Assets To Prevent Tsunami) but that is not necessarily a slam dunk. There is a possibility bondholders will pay some small penalty in this.

Professor Kevin Depew commented on the Bond King today in Five Things You Need to Know: Pimco’s Gross Lets the Freak Out. Inquiring minds may wish to take a look. Here is Depew’s conclusion.

The junkie’s dilemma, whether we’re talking about crystal meth, heroin or cheap credit, is that the spiral of addiction inevitably overwhelms any reasonable judgment about what constitutes a “cure.” That is precisely why a junkie can never be relied upon to offer up an honest, sensible path to good health. No matter what treatment or plan is offered, the only goal is to get the supply to the beast… at all costs. Today, Gross let the freak out. And the plan is simply to open up the government’s balance sheet to the beast… at all costs.

Mike “Mish” Shedlock
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