Monday, July 14, 2008

'De-facto Nationalization of Freddie & Fannie'


The Treasury and the Federal Reserve said yesterday that they would aid the GSEs by increasing lines of credit, easing some worries of further turmoil in the credit markets. Washington's efforts to shore up confidence in Fannie Mae and Freddie Mac was initially met with enthusiasm as markets opened today but that rally quickly dissipated as reality set in.

The fact remains that 'Freddie Mac is insolvent and Fannie Mae is running on fumes'. This band-aid solution will do nothing for stock investors of these companies. I agree with Richard Suttmeier of Rightside Advisors, that the latest measures are nothing more than the De-facto Nationalization of Freddie & Fannie. I quote the following:

The Fed to the rescue again - Didn't work in January when we had the surprise rate cut. Didn't work in March when Bear was bailed. We should have an oversold rally in financials from Fridays bargain basement new multi-year lows. Many bank stocks are trading at levels of the early 1990's.

Suttmeier was on Tech Ticker this morning. You can watch the interview by clicking here.

This morning Bloomberg reported that Citigroup has another $1.1 trillion in
off-balance-sheet assets composed of trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds. I quote the following:

"You will rapidly realize what a farce these off-balance- sheet things are,'' said Ladenburg Thalmann & Co. analyst Richard X. Bove. "You could pick up a lot of loan losses with the stuff you're putting back on.''

It's impossible to predict what the losses might be from off-the-books assets or liabilities because disclosures are thin relative to what is required for balance-sheet assets, said Neri Bukspan, chief accountant for Standard & Poor's in New York.

"A lot of information tends to disappear or becomes second or third class,'' Bukspan said.


I will repeat what I've already stated countless times: investors should underweight financials and use any relief rally as an opportunity to short this sector (or buy SKF, the Ultrashort Financials Proshares if any sustained relief rally develops). The carnage will continue in this sector as more banks fail (look at Washington Mutual, down a whopping 35% today!!!) and things will not stabilize until massive consolidation takes place.

The bond market is taking notice of the financial debacle. According to Across the Curve, with fear permeating the markets treasury debt became a sanctuary again. Yields fell across the curve today, a sign that bond traders are skittish and/or pricing in a significant slowdown for the second half of the year.

Finally, if you have not read it, I highly recommend you read Michael Hudson's interview with Mike Whitney explaining why the game is over as well as his more recent special report on Why the Bail Out of Freddie Mac and Fanny Mae is Bad Economic Policy.

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