Now we know. The implicit guarantee on Fannie’s and Freddie’s agency debt was "The Safety Net That Never Was" after all.
I would like to personally thank Margaret Kerins and the authors of this Bloomberg article  for calling FHFA chief Jim Lockhart out on his Wednesday [note: clearly that should have been "Thursday" — jm 2/21 2009] testimony to the effect that agency debt was subject to an explicit guarantee from the US Treasury.
The comments are Lockhart’s strongest yet in his efforts to combat doubts by investors about his commitment and that of Treasury Secretary Henry Paulson in standing behind the debt. The extra yield investors demand to own Fannie and Freddie corporate debt versus U.S. Treasuries fell today after his comments.
“It’s a clear move by the government to try to verbally reinforce the relationships with the government without taking any other action,” Margaret Kerins, managing director of agency debt strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said. “I think at some point the market will see through that, and force Paulson to say something, or fade it.”
“Up until this week, we haven’t heard Lockhart say `explicit’ before and we certainly haven’t heard Paulson say `explicit,”’ Kerins said. “They’re trying to put the GSEs back on par with where this FDIC-backed paper is coming.”
“Nothing has changed though,” she added.
Well, everything changed after Lockhart’s testimony hit Wall Street. We’ll never know if it was the startling clarity of the Bloomberg article or some blistering memo coming down the pipe from Treasury to FHFA, but Lockhart immediately published a clarification  that put everything in the sharpest perspective. The Explicit Guarantee the markets drew from Lockhart’s testimony was immediately switched to an Effective Guarantee backed by an Explicit Commitment from the Treasury worth up to $200 billion. One flick of the wrist in today’s shell game replaced the Full Faith and Credit of the US with some mad Alternative to AAA limited Treasury support, hence my new characterization of agency debt as being equivalent to Alt-AAA.
UPDATE: Looks like the "Effective" in the new guarantee isn’t going to be very effective. My apologies for not finding the original June post, but this blog article quotes Nouriel Roubini as saying: "… we estimated in June that the eventual losses for the government from this bailout could be as high as $200 to $300 billion, an estimate that is now shared by former Fed Governor William Poole." If the Good Doctor is right about that estimate, the Treasury’s $200 billion limit is already barely enough to possibly cover the existing damage. Any additional losses arising out of having Fannie and Freddie buy further suspect paper will then flow right to the GSE bondholders.
The MSM was in considerable confusion  over this story as the day progressed. Bloomberg reposted  their earlier story, but in doing so changed the word "Explicit" in the headline to "Effective," which had the effect of preserving both versions in the wild. Significantly, Ms Kerins’ comments were spiked in the second version. Here’s some of what Google News saw yesterday:
Meanwhile, back at the ranch, our trusty weekly Reuters report on central bank buying trends  included a nice analysis of where a lot of the pressure that influenced the above Foofah (if you’ll pardon the expression 😉 ) was coming from.
A federal measure to guarantee short-term bonds issued by banks has been perceived as putting them on a higher credit standing than securities issued by from [sic] mortgage agencies Fannie Mae, Freddie Mac and the Federal Home Loan Bank System.
Reuters reports a net buy of $12.57 billion treasuries and a net selloff of $8.28 billion agencies, for a healthy total net buy of US obligations of $4.29 billion. Those are both large moves, but much smaller than those in the previous two weeks (and not enough to crack either of Doom’s Top 10 lists). The basic trend towards treasuries and away from agencies continues, as is obvious in the raw numbers graph.
Obviously the agencies sell-off moderated considerably last week, but the trend is still to convert these to "no risk" treasury debt.
Last week’s move was not in the top ten.
However, if I recall correctly, it would be in about 4th or 5th place for sell moves.
The treasuries buy trend moderated quite a bit, too, and this week’s buy also failed to make the top ten.
However, the diversion caught in the ratio graphs continues unabated.
Notes and References: "Fannie, Freddie Have `Explicit Guarantee,’ FHFA Says (Update3)", by Dawn Kopecki and Jody Shenn, Bloomberg — Last Updated: October 23, 2008 12:36 EDT : "***MEDIA ADVISORY**** CLARIFICATION TO TESTIMONY", FHFA, October 23, 2008.
To clarify the last paragraph of page 3 of Director Lockhart’s testimony, the testimony should read: “The conservatorship and the access to credit from the U.S. Treasury provide an effective guarantee to existing and future debt holders of Fannie Mae and Freddie Mac as there is an explicit commitment by the U.S. Treasury to provide up to $100 billion in senior preferred stock for each Enterprise.”
: "Lockhart’s Fannie, Freddie Guarantee Remarks Stir Up Confusion", by Dawn Kopecki, Bloomberg, October 23, 2008. : "Fannie, Freddie Have `Effective’ Guarantee, FHFA Says (Update1)", by Dawn Kopecki, Bloomberg — Last Updated: October 23, 2008 14:06 EDT : "Foreign central banks’ agency holdings fall – Fed", Reuters, October 23, 2008. : "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York. : The updated data set as a Comma Separated Value (CSV) file is here.