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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Haim R. Branisteanu who wrote (12533)	9/30/2004 9:07:08 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Plunger on FNM The Justice Department opened an investigation of possible accounting fraud at Fannie Mae in the wake of a federal regulator's report that the mortgage giant may have manipulated its books to meet earnings targets. The criminal investigation, still in a preliminary stage, is the latest in the government's intensifying scrutiny of the fourth-largest U.S. financial-services company online.wsj.com This is a step up from the company just having to improve its accounting. Mind you, with the main effect of all this being that FNMA's growth is curtailed, I reckon its profitability could go up a lot. It is in practice a monopoly but has not been acting like a monopolist, it has been trying to keep expanding volume. Politically it had to. But now it has to restrict its balance sheet growth, it will raise the rates on mortages it buys and reduce them on debt it sells - supply and demand effects. So its profit will be increased on both sides. It couldn't do this before because the effect will also be to change the balance of benefit from the quasi-government status from the heretofore 40% to FNMA and management / 60% to reduce the rate on mortgages ... to 100% for the benefit of FNMA, because without being able to flood the market, commercial banks will be the marginal players and FNMA will match their price. It will no longer be the price setter itself. So, I bought back my FNMA shorts. But I'm staying long treasuries. The big loser will be the housing market where end user mortgage rates versus treasuries will be more expensive. On balance the Fed will have to be easier than it would have been otherwise. Plus with a reduced supply of FNMA paper to buy, treasuries will gain a bit of marginal demand too. Plunger.