The other guy's GSEs

Fannie and Freddie fell twenty something percent yesterday as the market digested a report by Barron's on the state of the Agencies. In practical terms the Barron's report seems to be pretty much correct: the Agencies will require recapitalisation, and it is unlikely this will be achieved without substantial help from the Treasury. However I do wonder about the timing. As the WSJ pointed out, it all depends on how big Paulson's balls are:

He can either continue to muddle along and inject a few billion dollars of preferred equity into Fannie and Freddie on an “as needed” basis until the end of the Bush administration in January.

Or he can go full steam ahead with a pre-emptive government takeover of Fannie and Freddie. Ironically, this radical step would make Fannie and Freddie an election issue. And perhaps only that would create momentum for true GSE reform.

The unfortunate reality is that politicians won’t embark voluntarily on a GSE overhaul a few months before an election. It isn’t a vote-winning issue. They would rather throw money at Fannie and Freddie and pray for a housing rebound.

The implication is that we will get piecemeal solutions to keep Fannie and Freddie afloat, just, until after the election rather than full scale reform. I think that's right. The agencies are going to be the next guy's problem.