The idea isn't that clear yet but the gist is:
- Set up a corporation called Federal Instituted Mortgage Corp (Effin Mac)
- The corporation then issues debt to purchase a combined of $200B mortgages total from both FRE and FNM.
- FRE and FNM will choose which asset to sell to the corporation.
- But FRE and FNM would be the equity stakeholder contributing a total of $20B.
- Then the Fed simply guarantees the bond of that corporation.
- This move, I know it will receive great sponsorship with Dodd, will 1) reduce the balance sheet consistent with deleveraging (new entity is now 1:10 leverage instead of 1:250, the original FRE/FNM however would still have about the same leverage amount because $200B is just 5% of the total portfolio) and 2) taxpayers can participate in lucrative mortgage business.
- Optional feature: To serve the market more efficiently, Fed can choose to release some of the capital ( up to 50% of it ) in a step down fashion through "special dividend" to shareholders if at predetermined times losses do not exceed threshold. FRE and FNM will have authority to manage, mitigate, and report the losses monthly to Fed so that process will not to delay the urgency of this project.
- The released capital can therefore be used to fund other new mortgages and serve this great nation.