Buying Into the Bailout

By Danielle Fugazy, M&A Magazine

September 8, 2008

Even though September is not the start of the year, in some ways it is a time for new beginnings. Children go back to school, football season begins and the private equity community gets back to work after a few lazy weeks at the end of August.

This year, getting back to work seemed like it was going to be pretty dreary, that is until the US government announced it would take control of Fannie Mae and Freddie Mac.

I view this as good news for the deal-making crowd. The move should accomplish a couple of things, not the least of which being that it has quelled global investors’ fears about the pair going under. It should also help lower mortgage rates. But, most importantly, it could make banks feel more comfortable about writing new business. If it does, the private equity community would benefit tremendously, not to mention the overall US economy. This bailout could set private equity back on track to business as usual. (That is, more lenders willing to lend and a larger number of closed deals. I don’t think we will be going back to the days over leveraging.)

Alas, while the bailout is widely touted as a smart move by the government, critics believe it won’t make much of a difference over time and it will increase the US government’s debt, pushing US further into a recession. As a result, the private equity community would not see a pick-up in deal activity.

The funny thing for me is that I agree with the critics arguments; there’s no doubt the government will go deeper into debt, but I don’t understand what their point is. The GSEs were in a world of hurt, and other than bailing the two mortgage giants out what were the options? Arguing that Fannie and Freddie never should have been in their current position to be begin with may be accurate, but that ship has sailed, and if Freddie and Fannie had been allowed to go bust we would be worse off than we are. This certainly seems like a good alternative to what could have become a serious disaster.

Danielle Fugazy

danielle.fugazy@sourcemedia.com