“Yes, Virginia – Creditors do sometimes get a vote …”, by Brad Setser, Council on Foreign Relations, September 2, 2008.

No wonder that the options market is now implies a significant probability that the Agencies existing common equity will be worth zero; look at this chart produced by Paul Swartz, a colleague of mine at the Center for Geoeconomic Studies.

If these trends continue for much longer, US Treasury Secretary Paulson will be forced to show his hand. The Agencies won’t be able to rollover their debt — at least not at a spread that works for them. The US government will then either have to step or let the Agencies fail. And, well, letting the Agencies fail, in the sense of default on their debt, is probably more than the US government is willing to consider right now. Any restructuring though would likely be bad for the holders of the Agencies common equity.

“Fannie-Freddie doubts grow”, by Saskia Scholtes, Financial Times, August 30, 2008.

Federal Reserve custody data on Thursday showed foreign official and private investors reduced their holdings of agency debt for the sixth consecutive week.

Bill O’Donnell, analyst at UBS said: “If this recent theme of cooling passions for GSE’s debt becomes a longer-term trend, then it could be problematic for the GSEs given that the central banks have taken . . . roughly 30 to 60 per cent of new GSE issuance in recent months and years.”

After I hit the “Insert Graph” button for the ratios I looked at the trend and thought, “Hey, I know that bubble.” There was a sharp rise in the demand for agency debt when the demand for housing rose. While the decline has been happening later than the housing bust, and we’re still early in this cycle, it does look like this potentially has a lot of room to fall.

Igor says “Chap 11″. Maybe for anyone else, but not the agencies.

I think the most pressing point is no one really knows where/when/how this will end…….. strange times indeed.