Fannie, Freddie Media Panic Overblown

So taken literally, the GSE's capital requirements would increase dramatically if their entire $4.5 trillion guarantee portfolio were brought on balance sheet. The commonly reported number is $43 billion for Fannie Mae and $38 billion for Freddie Mac.

Of course, it's ridiculous to think that regulators would allow an accounting-rule change to dictate the GSEs' minimum capital. Economically, the GSEs are no more or less safe whether this stuff is on balance sheet or off. It's especially ridiculous given that a capital infusion of that level would be impossible to achieve in almost any market, much less now.

Plus, the GSEs' alternative would be to sell massive amounts of mortgage-backed securities (MBS) on their books, which would benefit exactly no one. Indeed Office of Federal Housing Enterprise Oversight (OFEHEO) director James Lockhart has said point blank that FAS 140 should not apply to the GSEs and that accounting changes would not drive a capital change.

What is even more ridiculous is to suggest that Fannie Mae and Freddie Mac do not have access to cash. Note I didn't say capital, I said cash. The debt and securitization markets are wide open to both companies, with senior debt spreads no more than 20bps higher this week than the average for June. This doesn't help them to raise capital, but it does mean that neither is in danger of running out of cash.

That leads us to the final silly thing being bandied about: that a bailout of either or both would be too expensive for the government to handle. In reality, a government bailout would probably involve taking the companies into receivership and directly backing their debt. It might result in Fannie and Freddie being folded into FHA.