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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: carranza2 who wrote (37031)	7/13/2008 6:46:09 PM
From: TobagoJack	Read Replies (3) \| Respond to of 217546

just in in-tray, pre-market open flash ... the sovereigns will soon call in to say tora tora tora GREED & fear - flash It has long been obvious that the acute financial vulnerability of Fannie Mae and Freddie Mac were the most likely catalysts for the next systemic crisis. That crisis now looks like it has arrived, ahead of schedule, just four months after the extraordinary events surrounding the Bear Stearns triggered Fed intervention to prevent a meltdown of the credit default swaps market. GREED & fear says ahead of schedule because the expectation here has been for sometime that Fannie and Freddie would be formally nationalised in the first half of 2009 by a Democratic administration more ideologically suited to such actions. The problem right now is that the Bush administration remains, understandably, reluctant to saddle US taxpayers with the US$5tn liability represented by Fannie and Freddie. Yet continuing to pretend that there is not a fundamental problem of solvency is serving only to damage further the fast diminishing credibility of Federal Reserve governor Ben Bernanke and US Treasury Secretary Hank Paulson. This is clear from the renewed weakness in the dollar and the renewed surge in the price of oil. The latter market action is further evidence, if it is needed, that oil is trading as a non-dollar proxy. It is clearly possible that the administration may be able to come up with some fudge which allows Fannie and Freddie to continue to function in their present anomalous status for another few months until the November presidential election. But GREED & fear would not bet on it. The housing market is deteriorating too fast as is clear from Fannie and Freddie’s rising delinquencies. Fannie’s single-family home delinquency rate has doubled over the past year from 0.62% in April 2007 to 1.22% in April 2008, while Freddie’s delinquency rate has risen from 0.4% to 0.81% over the same period. It is also the case that Fannie and Freddie’s financial credibility cannot withstand any form of semi-detailed scrutiny. Fannie and Freddie have a combined “regulatory capital” of US$86bn, while the two own or guarantee US$5tn worth of US mortgages between them. The result of the above is that the Washington establishment is now paying the price of having allowed the dangerous anomaly represented by the half public sector and half private sector Fannie and Freddie to function for so long and to become such a vast part of the US financial system. Indeed Fannie and Freddie, by their aggressive accounting practises and by their willingness to buy dubious “private label” mortgage–backed securities, were in no small part responsible for the excesses of the housing boom. While the severe moral hazard represented by their anomalous status became too apparent with the accounting scandals that emerged in 2003. It is possible that the US authorities now act to do something about the problem before markets open in Asia on Monday, as happened with Bear Stearns in March. Still if the problem is not addressed proactively there is every risk of further panic. Shareholders look very likely to end up with nothing but Fannie and Freddie bond holders will be protected at all cost in what is likely to end up sooner or later, in formal nationalisation of these entities. Too big to fail in the real sense of the term, these elephants in the bathwater now account for most of net new mortgage lending in America. Thus, according to the Fed’s latest flow of funds data, government-sponsored enterprises (GSEs) and related mortgage pools accounted for 102% of net US mortgage borrowings in 1Q08, up from 20% in 1Q06 (see Figure 1)! The longer the present situation is left to drift, the greater the risk it ricochets into Asia in the sense that Asia is a massive holder of Fannie and Freddie bonds, which have been sold since the late 1990s as higher yielding US Treasury bonds. They are of course no such thing technically. The federal government does not explicitly guarantee this debt, which is why at some point the federal government will have to act. Meanwhile, the whole episode is a further blow to America’s eroding financial credibility and another landmark in the final death throes of the US dollar paper standard. In this context it was bizarre to watch Bernanke and Paulson discussing future regulation of the mortgage market in Congressional testimony late last week while Fannie and Freddie’s share prices were collapsing. This surreal behaviour is equivalent to a homeowner discussing what colour a future house is going to be painted when his present house is burning down.