What Watt Wants
In this analysis, we appraise Director Watt’s totally leaked plan for the GSEs which, while deferential to Congress, is nonetheless clearly aimed at setting a baseline from which Senate Banking’s bill proceeds. Consistent both with recent Watt statements and longstanding FHFA priorities, the key to the plan is converting the conservatorships into privately-held utilities, an approach we have long suggested would likely prove the most feasible transition strategy. However, lest GSE investors continue to jump for joy, it’s important to remember that a necessary condition Watt proposes – robust capital and liquidity standards – means that earnings will be a long, long time a ‘coming for new-style GSEs. Further, as detailed below, numerous complex transition questions may well require near-term USG guarantees not backed by private capital. This is a practical necessity of the Watt plan but not only an obstacle to near-term private profit, but also immediate political viability in the House.

GSE-011818.pdf