Saturday, September 06, 2008

The Gilding of Freddie and Fannie

The Federal Reserve is going to save Freddie and Fannie? It’s a little like taking your wife in for a brain transplant. She'll argue that it's not really that necessary. Do you get the idea that Bernanke is up to something?

It seems quite suspicious that Fannie and Freddie are really that bad off. They might hold some bad paper, but they probably don’t hold a large amount of crap (second trust deed and interest only loans). This seems more like a ploy to prime the pump for financing housing loans. A government guarantee of Freddie and Fannie gives their paper, grade A investment quality. It's called gilding the lily. Two years from now, this could be reflected upon as an incredibly stupid idea (if the housing market loses another 20 percent of value, the taxpayer could be caught holding the bag, not Freddie and Fannie).

The Bernanke-Paulson Car-Wash-Fund-Raiser for Freddie and Fannie is a last ditch effort at getting funding back into the housing market to keep prices from further deteriorating. So far the antics of this dynamic duo seems to have had little effect. Their dropping of the Fed Funds rate did little to keep the mortgage rates down. Home loans are at about 7% and creeping up. There are no home buyers.

The banks right now, are still Bernanke’s real problem along with other financial institutions like the hedge funds. Most FDIC insured banks that need cash, raise interest rates. The depositor gets a better deal than T-bills (ING bank is now offering 4% interest). If the bank goes belly up, the Fed gets to pick up the tab. It’s a win, win for the bank. With all of the junk written out here in Kalifornia, you would think that most of the banks in this state, would be on the Feds watch list. This money wasn't pulled out of thin air.

The next two weeks could prove very interesting. Interest rates should continue their trek upward. The Asian stock markets appear to be collapsing and it could spread to our markets. What seems to be very apparent, is a continuing contraction of the money supply. Throw in one or two hurricanes and a bank closure or two, that should keep the election off of page one.

Copyright 2008 All rights reserved


Anonymous said...


I've heard that ING was one of the few very conservative banks during the housing boom, that they did not get caught up in the lax lending frenzy. Do you have any insight into ING? I am considering purchasing a CD there.

Anonymous said...

Wa Mu is giving a rate of 5% APY on their online 12 month CDs. As long as you are investing less than 100k, at most, you may only lose a couple months worth of interest (if Wa Mu fails and it takes a few months to sort everything out). The high yield seems very much worth the small risk.

Remember, CDs are included in the FDIC. You will not lose any principle, or earned interest under 100k.

Jim in San Marcos said...

Hi Anon 12:37

ING mailed me an offer. If I opened up a saving accout of $25 they would match it, so I did. They seem ok to me, I just haven't seen an actual bank with the ING logo hanging from it.

Jim in San Marcos said...

Hi Anon 1:48

I thought 4% was good. Now you mention 5%. Do I hear 6%??

Until we get to 10% interest, you're better off spending it than watch it get eaten up by inflation.

I just came back from the grocery store. Potato chips are $3 a bag and toilet paper is almost a buck a roll. We're being nailed at both ends.

Thank you both for your comments

Anonymous said...

Jim wrote:
"The Asian stock markets appear to be collapsing and it could spread to our markets."

Jim I can remember some time back when you made a call on the Chinese market and now it appears to be playing out like you said.

I don't know how many people you draw to this website but it is not nearly enough.

Jim in San Marcos said...

Hi Watchtower

Thank you for the ata boy. One thing that I will point out, We can all (everyone of us) be right, We just can't all be right at the same point in time.

If you go back one post, I corrected my first comment to you. It came out wrong.

The site meter way at the bottom of the blog will give you the stats on visitors. Traffic is down somewhat.

I'm waiting for the Asian markets to open tonight about 6:30 for China. could prove interesting. I have a Bloomberg link to the Asian markets under blog links. It lists them all.

Thank you for your comments

Anonymous said...

OmG Jim! As always your sideline sense of wit always draws a belly laugh from me, and of course your clarity in your delivery on your topic is why I always why I return. I'm a longtime reader. You and I have eMailed before. ps- agreed, something doesn't pass the sniff test in Helicopter Land this weekend.


Anonymous said...

I totally agree with watchtower. Your reader draw should be much higher with your knowledge. I always feel like your blog is "a best kept secret". And realistically your blog title probably scares people off as an "extreme". Poor them, hurrah for your readers!


Jim in San Marcos said...

Hi Crashproofed

Glad you like it.

Being small isn't really that bad.

I cringe when I go to post a comment on other blogs and you see 200 to 300 comments. You know its a waste of time. If you don't read the previous posts, you have no idea if you are repeating what has already been said.

With this blog, your comments will get read. Sometimes there is a lot more meat and potatoes in the comments than what is in the posted article.

Thank you for the pat on the back, take care.

Anonymous said...

It's obvious that the Fannie and Freddie shareholders are in for a Federal screwing Monday, but what about bondholders? Do they get affected at all? Isn't China one of the largest bondholders in those companies?

John in Texas

Anonymous said...

I heard that Congress is going to approve a 350 million dollar appropriation to build a monument in honor of Barney Frank for all of his great work as Chair of the Banking and Finance Committee. Congressman Frank's lobbyist, (strike that) I mean his office issued a statement this morning that the take over of Freddie and Fannie is proof positive that during his tenure as Chair "his" initiatives and policies were very successful in allowing everyone from Main street to Wall Street to obtain a mortgage that they could not afford (and certain to default), and permitting banks to sell the mortgages off as securities to Fannie and Freddie, or any one else dumb enough to buy them.

Congressman Frank said that he is proud that Fannie and Freddie now have a reliable and sure partner i.e. The American Taxpayer.

Congressman Frank said that in light of this success, (and as suggested by Henry Paulson and Ben Bernake) he will expand his agenda and propose regulations that permit the Federal Reserve to make non-recourse direct deposits to Wall Street Investment Banks. Congressman Frank said that this will remove the stigma of Wall Street Bankers' having to access the Fed's discount window (the begging bowl). Mr. Frank said that he is living proof of the Peter Principal, and said that only in America could "a poor kid from the south side of Boston, and who has absolutely no clue about economics or finance rise to become Chair of one of the most powerful committees in Congress". Finally, this is inside information (please do not tell anyone because I would hate to ruin the surprise) but Mr. Frank has been nominated for the Medal of Freedom.

Hope all is well, and remember not to worry Barney will protect us!

Anonymous said...

continuation of prior post,

The post concerning the Fannie/ Freedie conservatorship, presents a soley satirical overview of the many problems in the financial system, and the typical blame game that permeates our political culture and media.

However, in all seriousness, Rep. Frank and other well intentioned public officals are presented with a daunting task, and Rep. Frank (who by the way is highly educated), and other officials must navigate a way around the many problems and unknowns currently facing the financial system and markets. The important point in all of this is that they must now implement policies that will implement long term solutions so that there is a greater balance in economic cycles.

Over the last 25 years it seems that we have had a boom and then bust series of economic cycles. These boom to bust cycles seem to create more harm to the economy and greater costs to the taxpayer. Although many programs, such as greater home ownership are well intentioned, more foresight may be needed to evaluate from the very begining potential negative impacts of such programs (and others) so that appropriate mechanisams are in place to address the anticipated problems before they get out of hand.

With proper evaluation and policy these goals can be achieved.

Superbear said...

It might be the case that one of the big banks might fail in the next 2-3 weeks. We'll see.

I do think that the treasuries and US$ have very little to downside risk in the short-term. Simply because that the Fed will squeeze liquidity driving everyone into bonds (and out of stocks). They would like to keep yields low. Besides a stock market sell-off triggers a global equities sell-off driving everyone into US$.

So, I would go short on stocks, long on US$ and bonds.

In a few months (or a year), treasury supply can't be absorbed by the market, then we shall see the treasury blow-off and that would be the last bubble to blow and push us into deflation.

Til then.

I'm Not POTUS said...

What I find sad is the most of the comments I have read around the blogs and "news" is that people assume foreign governments bought our debt for financial gain. Nothing could be further from the truth.

They buy our debt for the express purpose of controlling the debt junkie. The will keep the junkie alive as long as it serves their goals. Once we outlive our usefulness, we will be killed off.

The problem we have now is that these FCB are having divergent self interests. Russia wants to play bad cop, China is playing good cop, but in the end they want to put us away for good.

Paulson and Ben are fools to think that herding the world into the US$ will let them keep the upper hand.

How much do you think it is worth it to the Russians or the Chinese to wrest global domination from the US?

Going to war with real bullets would cost trillions upon trillions. Throwing the US/EU under the bus gives the same results of domination for pennies on the fiat dollar.

The Russians have a strangle hold on energy to the EU. The Chinese have total control of the value of the US$. Both of them are fully prepared for brinksmanship.

As Abe Lincoln said: ""At what point shall we expect the approach of danger? By what means shall we fortify against it? Shall we expect some transatlantic military giant, to step the Ocean, and crush us at a blow? Never! All the armies of Europe, Asia and Africa combined, with all the treasure of the earth (our own excepted) in their military chest; with a Buonaparte for a commander, could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years. At what point, then, is the approach of danger to be expected? I answer, if it ever reach us it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide."
Paulson has committed our suicide this day.