The Good News For Taxpayers:

"With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares."

"While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise."

"Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses."

The Bad News For Taxpayers:

“To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.”

• [Ciovacco Capital Management (CCM) comment: This means taxpayers will take on more risk in the form of additional mortgage-backed securities above and beyond what Fannie and Freddie have now. No one else in the free market wants to take on this risk, so the taxpayers will do it.]

"Treasury will ensure that each company maintains a positive net worth."

• [CCM comment: This should read “the taxpayers will ensure each company maintains a positive net worth.”]

“The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.”

• [CCM comment: The credit facility is ultimately backed by the taxpayers. No one else wants to lend Fannie and Freddie money, so the taxpayers will do it.]

“Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS.”

• [CCM comment: No one in the free market wants to buy these mortgage-backed securities (MBS) from Fannie and Freddie, so the taxpayers will do it.]

The Spin For The Public:

"Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today's action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.”

• [CCM comment: This means those of you who own preferred stock issued by banks and financial institutions should not be concerned if the value of Freddie and Fannie preferred and common shares plummet in the coming days and weeks. Everything is fine.]

“Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.”

• [CCM comment: Even though we told you Fannie and Freddie were fine five weeks ago and now we feel we must take them over, you should trust us when we say the housing market is going to be fine and the banks will be fine too. No need to panic and no need to sell your stocks.]

NOTE: The portion of the article below was written on Saturday before Sunday's detailed Fed announcement.

Welcome To The Mortgage Business

As a U.S. taxpayer and private citizen, I never intended to enter the mortgage business. According to reports published after the markets closed on Friday, all U.S. taxpayers will soon be active participants and financial stakeholders in the U.S. mortgage market. When a homeowner decides to “walk away” from their mortgage obligation or cannot make the payments for any reason, you and I, without our consent, will be obligated to help.

What Are We On The Hook For?

Fannie Mae and Freddie Mac buy mortgages from mortgage originators. They pool the mortgages and sell an interest in the mortgage pool in the form of bonds. The principal and interest payments from the homeowners pass-through to bondholders in the form of a payment. If some of the mortgage holders default or simply walk away, Fannie and Freddie guarantee principal and interest payments to the bondholders. In the very near future, you and I as taxpayers will guarantee the principal and interest payments to the bondholders. You and I will stand behind what the New York Times referred to as “huge potential liabilities” which could cost the taxpayers “tens of billions of dollars”. Welcome to the mortgage business.