FM and FM now BFF with US TSY

Just a short one tonight.

The big news, of course, is that Fannie Mae and Freddie Mac, the two mortgage giants that underpin the US mortgage market, will be placed into conservatorship by the US Government in further attempts to stabilise the housing market and the financial system.

Markets around the world rallied on the news, with financial stocks (unsurprisingly) taking a large slice of the gains. But here's my question (and this is something I'd be happy to have explained to me): given that Fannie Mae and Freddie Mac had been treated like quasi-government agencies to begin with, what actual advantage does placing it into conservatorship actually create? Had this not happened, the US Government would still have had to bail out the twin entities one way or another, to prop up the mortgage market and ensure that the MBSs issued by the banks have a buyer.

One can argue that, by turning the implied government guarantee explicit, declines in mark-to-market valuations of mortgage securities will slow or even reverse - thus providing impetus for market recovery. However, I see this as merely a short-term impact. The root cause, the cycle of housing downturns resulting in defaults and negative equity, has not really been resolved. Let's say this action results in some settling in the market, translating in easing of credit spreads above Treasury rates. This leads to some easing in the debt service costs of home mortgages. This is great news! Unless, of course, you are a subprime borrower - you are still shut out of the market. At its peak, subprime accounted for ~20% of home loans... taking out that much money from the system is not something you recover easily from just by lowering the cost of borrowing by a few part of 1%.

The real positive impact (and it has to benefit SOMEONE, since it's not immediately clear that taxpayers/homeowners will) may actually be that this process essentially turns corporate debt issued by Fannie and Freddie into government debt issued by the US Treasury... which is fantastic if you are a central bank or superannuation fund who invested in Fannie/Freddie bonds. I mean, US Treasury bonds, backed by a government with ballooning deficits and supported by a slowing economy, are the best proxy for risk-free assets, right?

Having said that, the greatest investor of our time disagrees with me, and he's had more time to think it over, so I may just be having a cynical moment.

UPDATE: Link to an article from the legendary Roger Lowenstein. Next up, let's play a game of "What Disaster Will Today's Morally Hazardous Actions Lead To?". At current pace, the next one should only be five years away.