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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: Real Man who wrote (65352)	8/14/2003 1:04:02 PM
From: mishedlo	Respond to of 94695

Thanks M

To: Real Man who wrote (65352)	8/14/2003 1:12:47 PM
From: mishedlo	Respond to of 94695

From Daily Reckoning - Mortgage giants Fannie Mae and Freddie Mac may be flaming out already. Now that the 10-year Treasury yield sits a whopping 147 basis points above the yield of 3.09% it touched on June 13th, what good could possibly befall a mortgage lender, especially a highly leveraged, thinly capitalized, ultra-aggressive mortgage lender like Fannie Mae or Freddie Mac? - Your New York editor has no personal axe to grind against either mortgage lender (although a member of his family is short one of the stocks), but as a seasoned observer of the financial markets... he suspects that the shares of these two financial giants are, best case, two of the most dangerous 'longs' in the U.S. financial markets. - According to the New York Times, Fannie's own 'What if?' scenarios from a few months back predicted that the company's portfolio would suffer a $7.5 billion loss "if interest rates rose immediately by 1.5 percentage points." Guess what? 10-year Treasury rates have jumped 1.47 percentage points in less than two months. Does this mean that Fannie is nursing some multi-billion portfolio losses? Investors should not be surprised if this were true. - What's more, according to the Prudent Bear's Doug Noland, Fannie Mae's balance sheet is ill-prepared for adversity. "Fannie Mae ended June 30, 2000 with a Total Book of Business (mortgages held in its retained portfolio and mortgage-backed securities it has guaranteed) of $1.247 trillion," Noland calculates. "The company had an Allowance for Losses of $808.9 million, or 0.06% (six basis points) of its Total Book of Business... Over this period, the company has gone from $1 of loss reserve for every $1,541 of business exposure to $1 for every $2,537 of exposure... It will take some time, but the thinly- capitalized and fatly risk-exposed GSEs have (with the Fed's assistance) placed themselves in serious harm's way. I see no way for these institutions to now sidestep eventual collapse, unless speculative market dynamics are somehow repealed." - Imagine a parent who stores crates of explosives under his baby's crib and you will understand something about Fannie Mae's approximate financial profile. Now imagine that the parents slide the baby's crib and explosives over next to the radiator (in order to make room for more explosives) and you will understand something about Fannie Mae's corporate philosophy: 'But why worry; the explosives are unlikely to detonate.'