Agency debt widened last week as the market learned of a draft GSE legislation proposed by Senate Banking Committee Chairman Richard Shelby, R-Ala, that may take away the GSE’s implicit government guarantee.
The draft gives a new independent regulator, which will be overseen by the chairman of the SEC, the Secretary of the Treasury, and the Secretary of the Department of Housing and Urban Development, the authority to set capital requirements and the authority to liquidate the GSEs in case of insolvency without congressional approval. According to the draft bill, a liquidation of the GSEs could take place at the expense of creditors. Tax payers would thus become senior to the debt holders. A vote on this bill is scheduled for Thursday this week.