My Diary 422 --- My Thoughts to GSE Rescue Plan

My Thoughts to GSE Rescue Plan

I think we need God help A-shares and God save American, then Hong Kong Market can back to normal!!

Performance wise, March Bear Stearns rescue rallied the market 2 months, July nake-short ban saved the market for 2 weeks, how long will this GSE bail-out last for – One week or one day?

The initial market response to the government’s GSE rescue plan has been positive. One objective of the plan is to insulate the financial system from the damage that would have occurred had the GSEs failed. The plan also is intended to support the housing market by improving the availability and terms of mortgage financing. To this end, the GSEs will be allowed to expand their portfolios in the near-term. The plan also authorizes the Treasury to purchase agency-sponsored MBS.

But I believe the GSE rescue is only helpful for the near-term sentiment. Bottom-line is, with unemployment rate moving higher, housing price will go down further. The “buy-out” solution provided by Henry Paulson is simply put s floor price to Agency MBS, not indicating the mortgagee and mortgage derivative markets have back to normal. I would prefer a “sell-out” solution somewhat like RTC in S&L crisis. Moreover, the plan is to cut the size of GSE balance sheet from 850bn to 250bn over the next decade, not helping the recovery of housing finance market in my view…

Next week is very big --- broker earnings and FOMC Meeting …Stay Alert !

 
Cheers for the bear market!