T Nation

Fannie and Freddie: Bye Bye

"There are a lot of things to worry about now. For starters Fannie and Freddie Mac are on the verge of going to zero. According to Barclays Capital the two companies will have to raise $225 billion of short-term to debt over the next six weeks. Of course they won’t be able to do that in the private markets with crashing stock prices.

That means that the first government $100 billion plus bailout of Freddie and Fannie is right around the corner.

I don’t think the stock market or the bond market will take that too kindly,

because it will mean the government raising the white flag and announcing to the entire world that it will print any amount of money to bail out these two companies and with estimates for their losses to reach $500 billion to even a trillion that is a lot of money we are talking about.

Economists are also estimating another $500 billion to trillion dollars will be spent by the FDIC to cover bank failures. Put the two figures together and you are talking about the government having to add over one trillion dollars to the deficit in the next year as a result of the credit crisis.

That’s serious money printing. It means serious trouble for the economy and the stock market and most likely a huge explosion in gold prices once gold gets it footing."

http://www.marketoracle.co.uk/Article6093.html

I know its hard to accept but we really are on the verge of the next Great Depression in this country — massive debt liquidation, millions of homeowners kicked out or taxed out, state and local governments completely and totally bankrupt, the end of police, fire, and water services (or at VERY reduced service). This is going to be bad.

Whoever we elect will become a dictator, or we’ll simply dissolve as a nation. Choose wisely, grasshoppers…:>

[quote]Headhunter wrote:
"There are a lot of things to worry about now. For starters Fannie and Freddie Mac are on the verge of going to zero. According to Barclays Capital the two companies will have to raise $225 billion of short-term to debt over the next six weeks. Of course they won’t be able to do that in the private markets with crashing stock prices.

That means that the first government $100 billion plus bailout of Freddie and Fannie is right around the corner.

I don’t think the stock market or the bond market will take that too kindly,

because it will mean the government raising the white flag and announcing to the entire world that it will print any amount of money to bail out these two companies and with estimates for their losses to reach $500 billion to even a trillion that is a lot of money we are talking about.

Economists are also estimating another $500 billion to trillion dollars will be spent by the FDIC to cover bank failures. Put the two figures together and you are talking about the government having to add over one trillion dollars to the deficit in the next year as a result of the credit crisis.

That’s serious money printing. It means serious trouble for the economy and the stock market and most likely a huge explosion in gold prices once gold gets it footing."

http://www.marketoracle.co.uk/Article6093.html

I know its hard to accept but we really are on the verge of the next Great Depression in this country — massive debt liquidation, millions of homeowners kicked out or taxed out, state and local governments completely and totally bankrupt, the end of police, fire, and water services (or at VERY reduced service). This is going to be bad.

Whoever we elect will become a dictator, or we’ll simply dissolve as a nation. Choose wisely, grasshoppers…:>

[/quote]

HH, I hear you, however our economy is much different today than it was in 1920’s. Don’t pull the pin yet!

The market has been expecting this all along.

The question is how does one prepare or even make money on the situation?

This will bounce back and the Federal government stands to make a massive profit from the takeover if they are smart about it. The sky isn’t falling.

[quote]Zap Branigan wrote:
This will bounce back and the Federal government stands to make a massive profit from the takeover if they are smart about it. The sky isn’t falling.[/quote]

What is your basis to feel so optimistic about the current situation?

All the indicators say this is the start of a recession. unemployment is steadily rising, people are defaulting and falling behind on their home loans, inflation is high and rising. The government has slashed interest rates and now tax payers money is being used to assume control of F&F the largest mortgage lender in the world - I am sure the government are not looking at this as an investment opportunity.

[quote]JamFly wrote:
Zap Branigan wrote:
This will bounce back and the Federal government stands to make a massive profit from the takeover if they are smart about it. The sky isn’t falling.

What is your basis to feel so optimistic about the current situation?

All the indicators say this is the start of a recession. unemployment is steadily rising, people are defaulting and falling behind on their home loans, inflation is high and rising. The government has slashed interest rates and now tax payers money is being used to assume control of F&F the largest mortgage lender in the world - I am sure the government are not looking at this as an investment opportunity.

[/quote]

lol, of course they are!

People completely do not understand economics. People have been shouting recession for over a year now, and have yet to be right. Sometimes they don’t even find out that we are in a recession until it is actually over.

Yes the economy has slowed, and yes there are some problems with the economy. But does that mean people should turn into chicken littles?

The recent drop in housing prices is only a drop back to reality from the ridiculous bubble we were in.

The defaults in loans are really on the secondary market. That is the high risk market. If you only qualify for the high risk market, it means you should not have gotten the loan. It means you are too high of a risk for paying a normal mortgage, so why should you think its going to be easier to pay the double interest rate?

Then the secondary market was infiltrated by thieves and fools. Sell anyone a mortgage regardless of whether or not they could pay. People were getting mortgages bigger then their incomes.

What idiot sold that loan? What idiot thought they should get that type of loan?

dhickey has it right here. There is always opportunity, as long as your not spending all your time whining. Regardless of what you have heard, the depression actually created a surprising number of rich people. And these were people who were not rich before the depression. Just people who were smart.

Foreclosures high? Go bargain hunting. People losing their houses? Guess what, that doesn’t hurt the rental market.

People keep focusing on the 6% unemployment without ever thinking about the fact that this means they have a 94% chance of having a job. And the fact that 5% is concidered full employment because it is known that at least 5% of the population doesn’t actually want a job.

I have known people to work the “unemployment circuit”. And by that I mean people who get a job only long enough to qualify for unemployment benefits, then get fired, but in a way that does not negate benefits. Once the benefits dry up, do it again.

Since the government extended benefits for people, they can wait a few more weeks before they need to actually get a job. Economists know this. (Or at least they should.) But the media still reports the terrible economic news of the rising unemployment.

Holy cow mage, I really like reading your posts. I wish more people used as much common sense and reasoning like you do when commenting on issues like these.

Falling housing prices/foreclosures + low interest rates + inflation = oportunity to make money in the housing and property markets.

So you get a house cheap, pay little interest, and end up paying back less in real terms with inflation. Now is not the time to pay off your house, now is the time to mortgage it to the hilt and buy more investment property with the banks money that will be worth a lot less in 15 years.

People prefer negativity, I guess. Rain or shine, certain people (esp. the optimistic) continue to support themselves financially.

The others sit on teh interwebz blaming everyone else for their troubles.

[quote]dhickey wrote:
The question is how does one prepare or even make money on the situation?[/quote]

Not too hard, if you think the Fed can turn Freddie and Fannie around.

The bottom fell out of their already low share prices with FRE falling over $4/share, and FNM falling over $6. Both are priced under $1/share as of the market close today.

$800 will get you about 1,000 shares, and if the fed does even a marginal job with correcting the respective ships, you could see a doubling of your money relatively quickly.

[quote]The Mage wrote:
People keep focusing on the 6% unemployment without ever thinking about the fact that this means they have a 94% chance of having a job. And the fact that 5% is concidered full employment because it is known that at least 5% of the population doesn’t actually want a job.

I have known people to work the “unemployment circuit”. And by that I mean people who get a job only long enough to qualify for unemployment benefits, then get fired, but in a way that does not negate benefits. Once the benefits dry up, do it again.

Since the government extended benefits for people, they can wait a few more weeks before they need to actually get a job. Economists know this. (Or at least they should.) But the media still reports the terrible economic news of the rising unemployment.
[/quote]

You realize the government has been tweaking the economic statistics, especially inflation and unemployment, since the 1960s? The real unemployment rate is probably over 9%. Harper’s magazine had a good article on this a couple months ago.

Does everyone deserve a mortgage? Our government, mostly Dems, think so.

The government forced the banks to quit ‘redlining’, or at least reduce it. It then gave FF the authority to buy these risky mortgages, which they did. The banks got the cash and the taxpayers got stuck with the tab. F and F could buy these instruments because they knew that the gov’t couldn’t let such a thing fail. Everyone got in on the gravy train, with hundreds of preferred stock issues and bonds, all backed up by us, the taxpayer.

We just got royally raped, not one scream heard from the MSM, and the stock market went up. No wonder — Wall Street just raped us and got away with it.

Old man Depression you have gone and done us wrong…sing a long everyone, while we get raped.

http://www.freerepublic.com/focus/f-news/2077303/posts

“Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that�??in combination with many other factors�??helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded “kickbacks” to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.”

[quote]GDollars37 wrote:

You realize the government has been tweaking the economic statistics, especially inflation and unemployment, since the 1960s? The real unemployment rate is probably over 9%. Harper’s magazine had a good article on this a couple months ago.[/quote]

Well I don’t have access to it, so I cannot comment on that article. Got anything from Vogue?

Well Mage, you have a lot of good points. The problem started in the secondary market. On the other hand, the reason they are failing is that people who had no business qualifying for a mortgage were getting them because there were people in congress telling FRE an FNM that they HAD to give mortgage opportunities to “underserved demographics” ie- low income high risk. Now, in a perfectly privatized environment, they have no right to do this… but FRE and FNM are quasi-governmental. Private but not private, and hence vulnerable to gov’t “instruction” or whathaveyou.

SO FRE and FNM started buying up junk paper. This is a huge problem because what this said is that there is an implicit governmental guarantee of a bail out for bad business practice. Furthermore, the primary people pushing this lending still do not want to reform anything. They want to bail out the companies, then do it again whenever it hits again.

Privatizing gains while publicizing losses is a bad way to go.

[quote]rainjack wrote:

$800 will get you about 1,000 shares, and if the fed does even a marginal job with correcting the respective ships, you could see a doubling of your money relatively quickly. [/quote]

RJ,
I would hesitate on this one. In all likelihood the current equity will be worthless. Since we guarantee the debt, we should want all current equity to be worthless and that the new equity be assigned to the party that took the company into the conservatorship.

While in most areas the housing prices are now coming back in lines with traditional income multiples, there are areas where the market will overcorrect and housing prices will go much lower than the historical trend. I would look for these areas and see if I couldn’t find a couple nice mult-family units that are underpriced to the potential rents that they would yield. There should be some attractive cap rates out there.

[quote]Aragorn wrote:

Privatizing gains while publicizing losses is a bad way to go.[/quote]

X2 Well said.

[quote]ajcook99 wrote:
rainjack wrote:

$800 will get you about 1,000 shares, and if the fed does even a marginal job with correcting the respective ships, you could see a doubling of your money relatively quickly.

RJ,
I would hesitate on this one. In all likelihood the current equity will be worthless. Since we guarantee the debt, we should want all current equity to be worthless and that the new equity be assigned to the party that took the company into the conservatorship.

While in most areas the housing prices are now coming back in lines with traditional income multiples, there are areas where the market will overcorrect and housing prices will go much lower than the historical trend. I would look for these areas and see if I couldn’t find a couple nice mult-family units that are underpriced to the potential rents that they would yield. There should be some attractive cap rates out there.
[/quote]

Fannie was up 20% this morning. Had I put my money where my mouth is, a $1400, 2000 share buy yesterday would have made me $300 this morning.

I am in no way suggesting anything remotely close to a long position in either FMN, or FRE. Speculation with money you don’t need is what I am suggesting.

With Dow Jones threatening to delist both Freddie and Fannie if their share prices don’t get to at least a dollar per share, I think they will recover 20 - 30 cents a share fairly quickly.

But you are right. I was watching some financial shows yesterday, and the consensus was that, with the bailout, the shareholder is pretty much screwed.

I made the same play with Sirius/XM. Bought in at $1.30 with my gambling money, and am letting it ride.

[quote]rainjack wrote:
I made the same play with Sirius/XM. Bought in at $1.30 with my gambling money, and am letting it ride.

[/quote]

More power to you brother. I prefer to find investments that I have control over rather than deal with speculative plays. Doesn’t make me right, just my preference. I hope this works out for you.