Maybe the fourth time's a charm.

First, it was the aggressive rate-cutting campaign. Next, it was the opening of the discount window. Then we had the bailout of Bear Stearns.

None of those past efforts saved the day, but the market is trading this morning as though this Treasury plan to take over Fannie and Freddie will do the trick. I was going to type here all the reasons that such conclusions are nonsense, and that I didn't even believe the stock market would close up on the day, but as I write the Dow is falling from its highs and is now only up 100 points. I'm going to post this now, then post an update to this with some more thoughts because I want to get down as saying this: don't buy this silly rally! I would not be at all surprised if we closed down today as the market came to its senses.

Back in a bit...

Continuing...

So, to put a very broad summary on what the Treasury is doing: it is standing in to buy the securitized loans the GSEs have recently been unable to. Without GSEs buying up pools of home loans as they used to, mortgage credit availability has cratered in recent months, one of many factors pressuring home prices.

In their stead, the Treasury will now buy those securitized loans, taking the risk that those loans will be paid off by borrowers; with a still-falling real estate market and delinquency rates on the rise, it's a bet that only the government would make today. 

Treasury's "systemic risk" argument is that without this move, financial markets would have ground to a halt on the back of a collapsing housing market. That might have been true, temporarily, but it is only through lower home prices-- affordable levels that people can actually afford in a tighter, post-bubble lending environment-- that private sector home lending will again take place in earnest. Government has simply decided not to wait, and will begin underwriting loans at today's still-too-high prices. Some level of losses are assured because home prices are still going to fall and default rates are not done rising, the only question is how much-- meaning specifically how much it will cost all of us as taxpayers. It's government, so it's safe to assume those losses will ultimately be much bigger than advertised.

We're all Fannie Mae shareholders now.

Fundamentals

The problem with today's rally is this: nothing has changed, fundamentally. Inventories of unsold homes are still on the rise; even if they peaked today, it would be at least a couple of years before those inventories would be brought back to normal levels. Defaults are on the rise. Our struggling economy is clearly being joined in its slowdown by others around the world, including the entire Euro-zone, where GDP growth currently resides just above zero. Tight credit conditions in the rest of the economy have yet to change. And there's one more big financial sector shoe yet to drop: commercial real estate.

No, today's move by the Treasury has not fixed anything. All Treasury has done is decide to catch a decidedly falliing knife with your tax dollars.

There's a reason Bill Gross is the best

The GSE's have always had an "implicit" guarantee from the federal government. What exactly that meant and when it would show itself was always a question, but most assumed that in some time of turmoil, government would step in and back Fannie and Freddie. Well, here it is.

In recent weeks, Bill Gross has been out talking aggressively about how government needed to make a move exactly like this.

What may be less well known is that in recent months, he has backed up the truck and been buying a ton of GSE debt, adding to his already significant holdings. Regardless of whether one thinks it was right or wrong of him to be talking his book so actively in this instance, given how agency debt is rallying across the board, the wise folks at Pimco are having a very, very good day indeed.

Gross bet the farm that the implicit government guarantee would in fact become an explicit one, and he was right.