Stand by for Shut Down
Ahead of possible systemic designation for Fannie and Freddie, FHFA is barreling through the systemic rulebook, finalizing capital rules, proposing liquidity standards, and, now, finalizing living-will requirements to ensure orderly GSE resolution under even acute stress. Our in-depth review of the rule reinforces our initial assessment: FHFA is doing its damnedest to withdraw the “effective” USG guarantee accorded the GSEs in 2008 that has ever since guided market perception. Not only would Fannie and Freddie have to plan for resolution without a helping hand from U.S. taxpayers, but FHFA now emphatically states also that the GSEs – as is and as they may become – are the only obligor of their debt and MBS. This reinstates the language of the 1992 Act as an operational reality instead of a long-ignored bit of disclosure. Just as like-kind rules for the biggest banks persuaded markets that their implicit guarantee is gone, so too might FHFA begin to crack the TBTF nut for Fannie and Freddie at cost to them and distress to many market participants.