Thriving equity markets are pretty much always good news in structured products land, so the latest injection of hope to brittle financial markets has been well-received. The latest jump in equity markets from Asia through the world’s time zones came as the US government finally took the helm at mortgage making giants Freddie Mac and Fannie Mae, injecting a reported US$200bn into the coffers of the beleaguered mortgage makers.
The markets liked the news – why wouldn’t they? The most powerful capitalist force in the world has finally stepped up and taken responsibility for allowing the US economy to overheat. But why now, and, more to the point, why no action earlier? President George Bush was presented with the idea that Freddie and Fannie should take over the 50% of the US mortgage market that they didn’t own many months ago, and he rejected it. Several money-losing months and the loss of one prominent US investment bank later, the Bush administration has changed its mind again on the virtues of intervening in financial markets that are becoming less free by the day.
Missing the earlier opportunity to put Freddie and Fannie in the limelight was a mistake, and now the US taxpayer – like the UK taxpayers who were told to hold up Northern Rock – will bear the cost.
The markets have reacted positively, but what will they say in the medium and long term? Probably the same as they are saying today. After all, if you were deep in debt you would welcome the introduction of a lender of last resort with pockets as deep as the US government.
How long before some clever egghead locked in a structured products laboratory comes up with a cunning new product designed to exploit a market that we now know will never be allowed to fail?
