Thursday, August 6, 2009

Fannie and Freddie

I usually don't do this but I am going to speculate on a little conspiracy theory I have come up with. Two days ago Moody's came out with a report that the government was going to probably wind down Fannie and Freddie. Yesterday James Lockhart III who oversees these two entities announced his resignation. The thought being mulled by Washington according to MSNBC is to "strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said. The bad debts the firms own would be placed in new government-backed financial institutions -- so-called bad banks -- that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate."

I find it interesting that it is almost a year when Fannie and Freddie made their way on the scene and Hank Paulson made his famous Bazooka comment.

Anyway, why now? Why are they moving this direction currently? Think think think. Well who knows but my theory is that it may have to do with disclosure. I have several friends connected to that whole situation and I am hearing the eventual losses could be out of this world. Of course there has been nothing but back slapping and false hopes spouted with how good everything is going to end up.

Let's run with this disclosure thought a little more. If these two guys do have major undisclosed losses, well of course other financials do also. If Fannie and Freddie are a public company that has to report all this, auditors will use this stuff to help them determine if the marks for say JP Morgan or Government Sachs is indeed accurate. EWWW, that wouldn't be good now would it? Also, there will be big press releases and 10-Q's that will be very easy to go through for inquiring minds to see what kind of farce this all is. If a new shadowy government entity is created, presto, disclosure becomes that much more clouded. No more lengthy q's, maybe just a few pages or slides of selected inflation.

These are all my own thoughts but it can't be an accident that all of a sudden now they want to make the bad debts disappear into a government eating vortex.


Clayton said...

You and the Market-ticker guy must have your cycles aligned today. He's saying the same thing and using cheesy graphics, too!

My question is - how do we trade this? Short the "phone book" as they say? Where does all the money go this time if the credit of the United States is part of the reason for the crash? Will everyone dump into Treasuries again? Or will metals skyrocket?

Clayton said...

Metals are so hokie, though. Maybe I need to get over that, but I still can't bring myself to buy a bunch of metals. Are soft commodities going to have some of the same effects?

Market Seer said...

Ha, I don't follow the market tickers blog to much. I think we agree on the overall view but I find that his blog has more factual inaccurate information than alot of blogs. Not to say that I get everything right but I try put qualifiers in when I am not sure on a factual data point.

After we blew through 1007 you trade carefully. After 1050 it seems like 1200 is on the way.

If your scenario is described, precious metals skyrocket. Copper probably falls.

I like soft commodities over the long term. Not sure how they respond in the short term with the scenario you describe. There will be two massive forces working in opposite directions.

Who knows where this market goes. We are more overbought than October 2007. Financials are 2 std deviations above their 50 day moving average. Everyone is in a buying/short covering panic. It's absurd.