On October 23rd FHFA’s Jim Lockhart testified that F&F had an “explicit” guarantee. He then immediately “clarified” that they had an “effective” guarantee capped at a clearly inadequate $100 billion each for Fannie and Freddie. That and some further reaction can be found at the Oct 24th episode of this series.

Where “strong” comes in is the infamous weaselly money quote from Bernanke’s Halloween speech:

“Needless to say, however, even if alternative organizational structures are considered for the future, the U.S. government’s strong and effective guarantee of the obligations issued under the current GSE structure must be maintained.”

The markets reacted to that one with the conclusion that the Fed and Treasury were just kidding.

For some reason, I haven’t been able to find the link, but I’m still wondering what a “stronger guarantee” is. It seems that either something is guaranteed, or it isn’t. I’m assuming the foreign central banks are thinking the same thing, hence the decline in agency purchases and the increase in treasuries.

“Agency Debt Investors Cheer FDIC Bank Guarantee Risk Weighting”, by Prabha Natarajan, EasyBourse, November 21, 2008.

Agency investors cheered the Federal Deposit Insurance Corp.’s decision to put the risk weighting of guaranteed bank debt on equal footing with that of debt issued by Fannie Mae (FNM) and Freddie Mac (FRE).

But the FDIC’s program still gives bank debt, which will be guaranteed for up to three years, a more explicit, and therefore stronger guarantee than the backing it gives agency debt.