Paulson Crosses Rubicon Lands In 5th Dimension

By: Mike_Shedlock

Earlier today I posted Operation "Rescue Fannie" Underway - Paulson a Blatant Liar . Since then, additional details are trickling out.

Consider Paulson's Statement on Freddie Mac, Fannie Mae .
First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards.

Previously reports were that the Treasury would provide $15 billion to Fannie and Freddie. That did not last but a half day as we shall see in the report Paulson Puts Treasury's Weight Behind Fannie Mae, Freddie Mac .

Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.

"They appear to be crossing the Rubicon," Sean Egan, president of Egan-Jones Ratings Co., a credit-rating company based in Haverford, Pennsylvania, said, referring to Caesar's invasion of Italy to set up a dictatorship.

Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing.

In the course of a few days we have seen Paulson go from saying Financial Institutions Must Be Allowed To Fail to requesting Congressional "authority to buy unlimited stakes in and lend to the companies".

Paulson now seems to be acting on the principle that as long as one is telling lies there is no additional harm in doing it with gusto. Otherwise it is very hard to explain how an " unlimited lending line "can possibly have " terms and conditions necessary to protect the taxpayer ".

There is one other possibility. Perhaps as Paulson crossed the Rubicon he landed in the 5th dimension. In some alternate universe, his statements just might make sense.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.