The markets got it wrong. When Bernanke and Paulson said that there would be no more bail outs of investment banking and the institutions would be allowed to fail, they weren’t talking about Freddie and Fanny Mae. These two institutions produce a product, a little like GM or IBM. They are not banks. They are business-to-business conduits, who package loans, for investment consumption, with an implied government guarantee.
There is no arguing that both Government Sponsored Entities (GSE’s) are highly leveraged and could eventually fall into bankruptcy. Most of the stuff on their books is 80% first trust deed loans. So even if real estate falls off of a cliff to say 50% of original value, these two Companies still stand to get back 70 cents on the dollar in a worst case scenario. The only really bad loans are those from the last 5 years. They held my note for 18 years, so there is a lot of high quality paper in their portfolios. During the heyday, the most they could have been clipped for in California was 417K per loan. The 1.2 million dollar homes out here are down to 600k and dropping fast. Just who owns that paper is a mystery.
Unless I stand corrected, Freddie and Fannie sold packages of loans. They didn’t sell them as STRIPS, CDO’s or SIV’s. It’s easy to cull out the losers and cut your loses if you hold a group of mortgages. If the investment groups that bought from Freddie and Fannie can return a full package, I would expect them to be made whole. The buyer could however, take a bundle of loans and slice and dice it; at that point, it’s kind of hard to return part of an item. A majority of the crap floating around is stuff that the GSE’s wouldn’t or couldn’t touch.
The collapses that Bernanke and Paulson are talking about are the enterprises that have many investors and are probably under the FDIC umbrella. The new prime directive is “No institution is too big to fail.” The one stop shop banks that do everything are what I would consider prime fodder; Citigroup and Bank of America come to mind.
Someone holds all of this credit card debt. Who is the “Countrywide” of “Plastic Money?” You hear that the average credit card debt is $5,000 per household. How about $5,000 per card? How many cards would you like to have Sir? One for each house you own? Hmmm! “I am just shocked, shocked that they would have so many cards!” Casablanca here we go again!
The banks in this country are very tight lipped about their finances. All it takes is a rumor to start a bank run. IndyMax just bit the dust. Senator Charles Schumer D –NY sent a letter to regulators June 26 claiming IndyMax was a dog. It started a bank run that ended as expected. 4,000 people just lost their job here. Maybe one of our fine Senators from California can reciprocate the favor and send a letter to regulators about Citigroup (based in NY), it's barking like a dog. Here is a new word for the dictionary, Verb: schumer, to be schumered, “screwed over by a politician.” Don’t look for it in a Readers Digest vocabulary test just yet.
Some killer favorites that could ruin your investment day: Citigroup, Bank of America and across the pond UBS.