Market speculation on a move by the administration to ultimately wind down the government-sponsored enterprises (GSEs) within the next 18 months picked up this week, with Moody's Investors Service indicating a positive outlook for bondholders under government support of the GSEs. But according to a Barclays Capital analyst, Ajay Rajadhyaksha, a winding down of the GSEs would upset the agency mortgage-backed securities (MBS) market. "[I]f the GSEs are spun off, the portfolio certainly goes into payoff mode," Rajadhyaksha wrote in a research note Thursday. Additionally, a quick winding down would see the GSEs cleaning the delinquency pipeline by buying out delinquent loans, which would then land in a federally-backed entity. This restructuring would invariably disrupt the agency MBS market, he said. If privatization occurs with the GSEs' investment portfolios, the debt would lose government backing, "an unthinkable proposition," according to Rajadhyaksha. The existing guarantee book, which is already facing massive losses to come, would likely stay with the government in such a scenario. "By default, the only business that can be privatized is new guarantee business," Rajadhyaksha said. "But agency MBS buyers, especially in foreign countries, are likely to be unhappy about the prospect of new agency MBS that is not backed by the US government. While we are not sure that the administration is thinking of a mortgage world without government backing, the mere possibility should make some MBS investors nervous. Write to Diana Golobay. Disclaimer: The author held no relevant investments at the time this story was published.