GSE Bailout

Well I have been sitting in the Alabama Birmingham airport for over 2 hours waiting for a delayed flight that is still delayed indefinitely for "maintenance" purposes (in other words it would crash if we took off). I figured I would use some time to type out some thoughts on the GSE bailout.

First, obviously my last post on the market giving you an opportunity to get out at the open ended up being completely wrong. If we were playing a fundamental game it would have been a gift as the jobs numbers were abysmal but the world has become a game of guess how the rules will change by world government entities. Obviously a few people in the know knew about this which caused a huge reversal in the markets on Friday especially in financials. In fact it goes before that. I posted on this blog numerous times all the crazy activity in the XLF calls starting a week ago Thursday. The volume was setting records and blowing out open interest and outpacing puts by 10 to 1. I could not figure out why though it makes sense now. My real problem is not that people knew. Way the world works. My problem is the double standard. There will be no investigations in the call buying unlike the put buying in Bear Stearns. No committees or U.S. Senate hearings. Why? Because it was going the "right" direction. Pushing stocks up is okay.

To the bailout. If you have somehow not been following the biggest financial news in decades if not ever you can read it here http://www.bloomberg.com/apps/news?pid=20601087&sid=aY5djDWqugYk&refer=home. Compared to Friday, as a bear, it is better than I thought it would end up being. Friday it seemed like the preferred would be saved and even the common might be saved. For the time being the securities have not been wiped out but essentially they have with the dividends of the preferred and common eliminated. Who have really been bailed out is the debt holders, especially the subordinated.

What is going on is fairly straight forward with multiple news sources and blogs covering it. What I am interested is what appears may be a bailout inside the bailout. Paulson also announced an extension of the credit facility to the FHLB. Since they lend money to banks is this a broader backdoor bailout of the banking system? It seems like this facility is Libor + 50 which does not sound like a great rate but not sure what the FHLB can borrow at normally. I have also failed to find any stated size of the facility and profess my ignorance at the intricacies of the FHLB.

The other issue is the FDIC is saying they "are prepared to work with these institutions to develop capital-restoration plans." Bloomberg puts it this way "regulators said they will help develop plans to restore capital at banks with ``significant'' holdings in Fannie Mae and Freddie Mac after the government seized control of the two mortgage-finance companies." How do you help companies whose investments are worth considerably less than if not wiped out without giving them capital? Who knows, it just seems there may be more than meets the eye.

What most people really care is the outcome in the markets. I think this probably helps with liquidity, probably takes away uncertainty, probably adds confidence, probably lowers the risk premiums, probably marginally makes housing more affordable, and so the market probably rallies in a major way. How long does the rally last? It seems like the outcome distribution potential is everywhere. The key I think will be in the credit spreads. If this calms the credit market down we could be in a for a sustained rally. I said a couple of weeks ago I thought a bailout was priced in. That was when the S&P was close to 1300. This puts the outcome of making our way to 1325 back in play. I don't think this is a long term game changer but it could be a several month game changer.

I had more but after 3 hours my flight is boarding.