We have been saying for four years that the GSE preferred-stock dividends to Treasury are “circular,” the word Treasury today used to describe them when it tore up this critical aspect of the conservatorship agreement.  In our view, the termination of dividend demands does not make GSE reform easier or harder.  What it does – critically – is reduce the prospects for a systemic crisis were Fannie or Freddie to come under liquidity or other stress.  The greatest risk of systemic market collapse would have come only after New Year’s, but any near-term market disruptions due to fears about GSE resources – already evident in the market – could have made the GSEs a most unpleasant surprise before the election.

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