Sep 6, 2008

Washington Post: Henry Paulson's plan to rescue Fannie Mae and Freddie Mac is really a bailout of the banks

Investor uncertainty over the long-term fate of the companies has left a pall over credit markets. It has been unclear which investors, if any, would suffer should the government intervene to prop up the firms.

The answer, in Paulson's plan, is that holders of preferred shares and subordinated debt, a riskier but higher-paying class of debt, might be made whole. Government leaders were reluctant to allow holders of those assets to incur major losses because they are widely held by banks, and major losses could cause a wave of bank failures.

~ Washington Post, "U.S. nears rescue plan for Fannie, Freddie," September 5, 2008

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