Does the rescue send the wrong signal to investors in terms of risk management?
JC: I think not. After the Freddie/Fannie rescue investors knew for sure that the common and preferred stock of financial institutions is risky. The Lehman bankruptcy makes it clear that the rescue of the senior debt holders in Freddie and Fannie was a special case. There is one small group of owners who lucked out with Freddie and Fannie – the subordinated debt holders. Subordinated debt stands in between preferred stock and senior debt and, arguably should have had its coupon suspended too. The US Treasury seems to have decided that this might make senior debt holders nervous and in any case the amount was relatively small. Q: Is it true that the mortgage portfolios of both Freddie and Fannie were dominated by prime mortgages rather than sub-prime mortgages? Has the crisis now spread from the lower end throughout the entire US mortgage market? JC: Yes, the vast majority of Freddie/Fannie mortgages are prime mortgages, with proper documentation and LTV ratios of 80% or less, or else c
