Government Hypocrisy in GSE Bailout?

In a sign that the more things change, the more they stay the same, the FT speculated today that the Treasury Department's takeover of Fannie Mae and Freddie Mac was constructed in such a way as to keep the pair's debts off of the government's balance sheets:

The government's 20-year warrants in Fannie Mae and Freddie Mac will not be triggered immediately. Officials were unable to explain why, but it might be that avoiding an immediate equity stake in the companies will strengthen the government's case for keeping Fannie and Freddie debt formally off its books.

(For the uninitiated, a warrant is similar to an option in that it allows the holder to buy stock or bonds at a predetermined price for a specific time period. The difference is that a warrant is issued by the company looking for funds while an option is an exchange-created product.)

But even if GSE debt were kept off the books, RBC Greenwich Capital's Alan Ruskin warns that investors won't be fooled:

Ironically, the very success of the [bailout] in the short run in having agency debt take on government debt characteristics may also reflect its greatest failing, in so much as the more the market thinks of agency debt as Treasury debt, the more it will add total agency debt to Treasury debt in assessing the United States long-term fiscal health. For this not to happen, some greater clarity on when the GSE will move out of conservatorship is going to be needed.

What effect bringing GSE debt onto government balance sheets will have on the U.S.'s borrowing costs is unclear. Moody's reaffirmed today its AAA ratings on U.S. gov't debt.

The case for putting GSE operations on the government budget is strong, the Congressional Budget Office said in July in a review of a (then potential) bailout:

...the proposal, especially to the extent it would result in any government acquisition of an equity stake in the GSEs, raises a significant budgetary question. Currently, data on the GSEs are reported along with federal budget information each year, but the activity of those entities is not encompassed within the budget. That treatment could change if the federal government's financial stake or control changes in a significant way.

The biggest irony, of course, is that while U.S. regulators are dealing with the effects of financial institutions' off-balance sheet entities (remember those SIVs?), the government itself is considering similar tricks.

One component of the bailout, however, will be counted as government outlays and that's the Treasury's program to buy GSE mortgage-backed securities. The plan -- intended to stabilize the nation's housing markets -- is "nothing short of a gift to future Administrations and Congressional budget committees," say Wrightson-ICAP economists:

Since the Treasury will count the investment in the new financial warehouses this year and next as budget outlays, the eventual liquidation of those loans - through amortization or future secondary market sales - will count as budget receipts. The investment portfolio presumably won't start to shrink until financial conditions improve, which means that economic conditions are likely to be helping to reduce the underlying deficit as well.