What is Frannie's Default Risk?

The FT today makes a stab at answering some of my Frannie questions, specifically the ones about whether Frannie debt is part of the USA's national obligations. Peter Orszag thinks it should be, but the White House seems to have been overtaken by events:

The Bush administration appeared to be caught by surprise. A spokeswoman for the Office of Management and Budget told the Financial Times: "We are working through this issue with Treasury and other stakeholders."

Any time a spokesperson starts talking about "stakeholders" you know they're stalling for time. Who are the stakeholders in the US government? Every voter?

There also seems to be a disconnect between US bond and CDS prices. The article quotes a bond investor talking about "flight-to-quality buying of Treasuries" even as it talks about CDS on US government debt widening out to 18bp. As Free Exchange notes, it's not exactly reassuring when the cost of protection on US debt is higher than the cost of insuring against default by Quebec.

One of the peculiarities of this credit crisis is that -- until now at least -- it's been surprisingly devoid of major corporate defaults. Yet the markets are still charging an enormous amount of money to insure against corporates defaulting. In that context, it makes sense to charge some small fraction of that to insure against the US government defaulting. And CDS on Frannie debt, as you'd expect, are somewhere in between.

So long as the defaults continue to be avoided, it's a way of transferring liquidity to those with deep enough pockets to be able to continue to write protection: a small group, led by Pimco.