bank run blog

In a move with ironic undertones, the Treasury has turned to Wall Street investment bank Morgan Stanley for advice on how to deal with the technical insolvency of the GSEs. The Washington Post reports :

“The Treasury said on Tuesday it hired Morgan Stanley to advise it on whether housing finance giants Fannie Mae and Freddie Mac are adequately capitalized as the government tries to determine how it would use its new powers to support the two companies.

The Treasury said it has no immediate plans to provide support to Fannie Mae and Freddie Mac, the two largest U.S. providers of housing finance that together guarantee more than $5 trillion of mortgage assets, but wants to understand how it would use its new powers if needed.”

Morgan is one of the 19 financial institutions, along with Fannie Mae and Freddie Mac, that are protected under the temporary SEC emergency order against short selling. The same institutions are exempt from the order, meaning they could all short each other if they wanted to. The order was recently extended. The Post continues :

“The Treasury said Morgan Stanley won a competitive bid process to conduct a “sensitivity analysis” of the companies’ financial profiles and provide an assessment of appropriate capital structures for the two firms.

The Treasury acknowledged that the move by Treasury Secretary Henry Paulson, a former chief of Goldman Sachs, to hire a Wall Street firm for advice on stabilizing markets is an unusual occurrence.”

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Bloomberg reports that Paulson is stressing that he isn’t about to exercise his new authority at this time :

“’We have no plans to utilize the temporary authorities,” the Treasury said in a statement released in Washington. ‘This action should be interpreted as a prudent preparedness measure, and nothing more.’”

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The Commerce Department reported Monday that consumer spending dipped by 0.2 percent in June, after taking account for the sharp rise in energy prices. The drop in consumer spending is the lowest reported by the Commerce Department since last February. Consumer spending fuels two-thirds of national economic output.

At the same time, the cost of consumer products jumped more than 4 percent over last year at this time, the biggest rise in prices since 1981. The Commerce Department’s inflation gauge rose 0.8% in the June, which was the biggest increase since February 1981’s reading of 1.0%. Government figures also show that American’s after-tax incomes fell by 1.9 percent in June.

While US Consumers confronted rising prices and falling incomes, the Commerce Department said the orders to US factories were up reflecting a heavy demand for military hardware and increases in petroleum products.

Associated Press : Rising prices beat down consumer spending in June
Reuters : June inflation jumps as incomes barely rise
BBC News : Prices hit US consumer spending