Evercore Pan Asset

The US Treasury has moved to support Freddie Mac and Fannie Mae, the two large mortgage companies that dominate the US housing market. In what amounts to nationalisation, the Treasury has pumped in new equity capital and offered guarantees.

Fortunately this action is not a replay of the Northern Rock drama. In these cases there was no run on the institutions to force the hand of the authorities. They were thinking ahead. Nor will nationalisation mean halving the mortgages offered and financed by the companies, as it does at Northern. The aim is not to reduce the staff and reduce the number of mortgages, as in the UK, but to make cash available and to try to stabilise a tumbling mortgage and property market. To this extent it is good news, and accounts for the immediately favourable response of the markets to the announcement. It is also an announcement without powerful critics and with powerful allies. It has united George Bush, and the two rivals for his job. It will have the support of the banks and of many struggling in the markets.

This is a potentially large budget commitment. The Treasury says that with careful management the taxpayer will have to put up very little. Let’s hope they are right. The fact remains that this is the biggest ever rescue, and the US taxpayer now effectively stands behind half of all American mortgages, offering to pay losses on them if customers default. That’s good news for all the other banks in the system but bad news for taxpayers.

It shows how serious the present crisis is that the US authorities think they need to take such drastic action. It is true that existing shareholders in the two FMs may lose all or most of their money, but everyone else implicated in making too many bad loans will have the protecting arm of the Treasury around them.

The art of getting through a crisis like this is for the authorities to say and do just enough to allow private sector solutions to emerge. Shunting all or most of the problem onto government balance sheets does not solve it. It just moves the problem on, to emerge in a different form on a different day.

If these institutions have lost a lot more than is so far reflected in their write offs, then the taxpayer now will have to pay for the losses. If these institutions were just suffering from too little overall liquidity in markets so that investors were being unduly pessimistic, there were cheaper and easier ways for the authorities to sort that out.

One way or another, the governments are taking over the bad loans and the portfolios of debt where confidence has been damaged. The European Central Bank has been busily taking in such paper to keep its banking system liquid. The Bank of England has done more of the same. The UK taxpayer has taken on responsibility for all the Northern Rock lending book, and now the US taxpayer is the reluctant owner of a couple of huge mortgage houses. Of course Central Banks should take in poorer paper and make money available when it is needed, but they should do so with large enough discounts and requirements for write offs that protect the taxpayers who pay their wages.

At Pan we have changed our view on the US dollar on the back of these decisions. We have decided to take some of the profits we have made for clients by holding cash in dollars rather than sterling. The pound has fallen by more than 10% against the dollar in a few weeks, which is a rapid move. Whilst we remain relatively pessimistic about the UK economy, the dollar will now also be subject to more worries about the state of their government’s fiscal balance and the amount of debt they will need to issue.

We will also be watching world equities carefully, as we see some scope for reappraisal of values on the back of this strongly stated intention to stop the fall in the US housing and mortgage markets. We have long maintained that two conditions needed to be met before we thought equities could make progress for investors – lower commodity prices and more liquidity in money and credit markets. We have enjoyed the former for a few weeks. This latest boost to the banking system of the world may not be enough, and has some worrying features, but it does represent more liquidity for banks and markets.