EMERGENCY: U.S. GOVERNMENT TO TAKE “UNLIMITED STAKES” IN FANNIE AND FREDDIE
July 14th, 2008WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
The firms that make the mortgage industry possible in the U.S. are about to be taken onto the books of the U.S. Government.
I don’t know of any clearer way of summing it up.
In all of my years of observing the farce of “the free market” in the U.S., it has never appeared more absurd than it does right now. This news is remarkable, even to someone as short the U.S. Dollar as me. This is take-your-breath-away kind of news.
Are they using the term “unlimited” because that somehow sounds better than $5.3 trillion, or is there something else we don’t know about yet? U.S. taxpayers and dollar holders are essentially going to eat the real estate crisis.
The advice I used to give was: Get your ass, your family and your money out of the U.S. It’s probably too late for that. Dig in. Shelter in place. Brace for impact, etc.
I would not assume that the banking situation will continue to unwind in an orderly manner.
If the herd begins to smell trouble, it will move with astonishing speed and ferocity. Don’t get caught trying to move your money to the exit as millions of zombies attempt to do the same thing.
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The Asian Forex session is underway and I’m trying to understand how the dollar hasn’t crashed through the remaining supports on this almost unbelievable news.
My best guess is that, rather than the system crashing to a halt, which it would have, this intervention has introduced yet another short reprieve and the dilutive effects of this aren’t baked into the dollar yet. Again, that’s just a guess. I’ll be relying on the chicken entrails and squiggly lines (technical analysis) going forward. For now, I’m not changing my allocations at all. I’m still unflinchingly short the dollar.
Via: Bloomberg:
Treasury Secretary Henry Paulson swung the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.
Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.
The announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the companies that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.
Paulson’s proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The two shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing.
Making `Explicit’
“It is time to recognize that the GSEs were always dependent upon government support and now we must make the implicit explicit,” said Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics in Torrance, California.
Paulson proposed that Congress enact legislation giving the Treasury temporary authority to buy equity “if needed” in the firms, and to increase their lines of credit with the department from $2.25 billion each. The temporary authority may be for 18 months, a Treasury official told reporters on a conference call on condition of anonymity.
As lenders retreated from the housing market, Washington- based Fannie Mae and McLean, Virginia-based Freddie Mac have grown to account for more than 80 percent of the home loans packaged into securities.
Freddie Mac is scheduled to sell $3 billion in short-term notes tomorrow, and Paulson’s comments indicate a concern about a collapse in private investors’ willingness to fund the firms. The companies issue debt to raise money for their purchases of mortgage securities.
Bond Sale
“This will shore up that debt offering,” said Paul Miller, an equity analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia. “They need to make sure that that debt offering goes well and goes very well and they couldn’t risk waking up tomorrow and having that offering go poorly.”
More: Federal Reserve Bails Out Fannie Mae and Freddie Mac
Kevin, are you still betting against the dollar using FXF and UDN? Seems like if the banking system collapses these securities will be worthless.
I’m betting against the dollar in a variety of ways. I hold NZ dollars, gold and UDN. Compared to my cash and gold holdings, my UDN position is small.
>>>Seems like if the banking system collapses these securities will be worthless.
HA. Fine. What would my gold be worth then? A lot.
People who have been predicting the end of the world have been wrong for thousands of years. Somehow, the horror show grinds on. Based on that, I’m willing to dabble around with a small portion of my capital in things like UDN.
It’s pretty clear that the Fed is more interested in selling out the dollar over time than letting the whole thing come crashing down all at once. They could have just let Freddie and Fannie fail, which would have resulted in soldiers on the streets, martial law, overt collapse, etc. But they didn’t. And, for whatever reason, the Asians and a few others continue to buy U.S. debt.
When the U.S. paper auctions fail, that will indicate that we’re into a very different—much more dire—phase.
What’s the best observable indicator that the US can no longer sell its paper? I mean, depending on how it shakes out, would it necessarily get reported on the front page of the WSJ? 🙂
>>>would it necessarily get reported on the front page of the WSJ?
I don’t know if you’re joking, but, yes, it would be reported on the front page of the WSJ and just about everywhere else. It wouldn’t just be “business” news. There are about 200 auctions per year. We’d know pretty fast if the Treasury was having trouble finding greater fools to keep funding this circus.