The Volokh Conspiracy - Question re Fannie/Freddie:

As I understand it, the common and preferred shareholders are basically being wiped out, but the government is backing Fannie and Freddie's existing debt, the value of which therefore rose. So here's my question: if Fannie and Freddie were heading for bankruptcy but for the government's intervention, why didn't the Treasury Department bargain hard with major holders of their existing debt (such as the Chinese government), and threaten to let Fannie and Freddie go bankrupt unless the debtholders agreed to write down the value of the debt? After all, there was no explicit guarantee of such debt, and Treasury still could have agreed to explicitly guarantee FUTURE Fannie and Freddie debt.

The way the bailout is structured, it seems that Fannie and Freddie shareholders, and the American taxpayer, are paying the price, but holders of the GSE's debt get made whole at the latter's expense. Why?

	[David Bernstein, September 9, 2008 at 12:27am] Trackbacks Question re Fannie/Freddie: As I understand it, the common and preferred shareholders are basically being wiped out, but the government is backing Fannie and Freddie's existing debt, the value of which therefore rose. So here's my question: if Fannie and Freddie were heading for bankruptcy but for the government's intervention, why didn't the Treasury Department bargain hard with major holders of their existing debt (such as the Chinese government), and threaten to let Fannie and Freddie go bankrupt unless the debtholders agreed to write down the value of the debt? After all, there was no explicit guarantee of such debt, and Treasury still could have agreed to explicitly guarantee FUTURE Fannie and Freddie debt. The way the bailout is structured, it seems that Fannie and Freddie shareholders, and the American taxpayer, are paying the price, but holders of the GSE's debt get made whole at the latter's expense. Why?