The US Government's backing of the insolvent Fannie and Freedie monsters may end badly and extend the contamination to American T Bills. The danger looms because of the enormous sums involved, not billions but trillions. Treasury Bills are considered the ultimate refuge of value, if they are suspected, and investors are like liebres on the run for their life during the shooting season, they will try to diversify out of them. WSJ writes:
Lets shout the Spanish conquistadores's battle cry: ORO....y mujeres. ¿Or was it SANTIAGO? No, gold it was. And women.
The Federal Reserve Act’s Section 13(13), created in 1933 and amended in the late 1960s, allows the Fed to lend to any individual, partnership or corporation with collateral backed by U.S. government securities or securities issued by federal agencies. Fannie Mae and Freddie Mac debt is generally included in that latter category of safe holdings, even though it’s not directly guaranteed by the U.S. government.
In March, the Fed used Section 13(3) of the act to extend its lending arm to investment banks during the Bear Stearns liquidity crisis (first with an initial Bear Stearns loan and two days later in creating the primary dealer credit facility). That provision allowed the Fed to lend during “unusual and exigent circumstances” only if a firm can’t borrow elsewhere. The latest Fed action Sunday requires neither finding. The collateral allowed for investment banks was much broader, while the Fannie and Freddie lending would be safer from the Fed’s perspective because their holdings are more liquid and don’t require the same safeguards. Lending under the 13(13) provision has occurred at various times from the 1930s through at least the early 1970s.