It will be interesting to see if this dose of cold water from former Fed governor William Poole will take any sizzle out of the forceful equity rally (the Nikkei is up 425 points as of this writing, and US stock futures say the US markets will also show an impressive move up). From Bloomberg:
“Some of this is a stopgap to try to prevent the mortgage market from falling apart,” former Federal Reserve Bank of St. Louis President William Poole said on Bloomberg Radio. The federally chartered, shareholder-owned structure, with risks covered by taxpayers, is “an unacceptable situation,” he said, projecting the Treasury may need to cover as much as $300 billion of losses..
Bloomberg is running the Poole comment in its headline, so it will catch the eye of traders. The rest of the piece featured mainly positive reactions from the usual suspects. For instance:
“This action should lead to an increased availability of mortgage financing, which will help achieve stability in housing,” Bank of America Corp. Chief Executive Officer Kenneth Lewis, said in e-mailed remarks…
“Paulson has threaded the needle just right by taking necessary action to stabilize U.S. financial markets while minimizing the liability for taxpayers,” Schumer of New York, who heads the congressional Joint Economic Committee, said in a statement. “This plan will be met with broad acceptance in Congress because it doesn’t prejudge the ultimate fate of Fannie Mae and Freddie Mac.”
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Insanity continues; goose the market in Japan and then halt trading for Fannie.. Free markets at work; Adam Smith would love this!!
http://www.nyse.com/press/1220610346765.html
The New York Stock Exchange (NYSE) announced that the common and related preferred stock of Fannie Mae (ticker symbol FNM) and Freddie Mac (ticker symbol FRE) will be halted news dissemination during the pre-market and available to all markets for trading at 9:30am (EST) on the morning of Monday, Sept. 8, 2008 due to U.S. federal regulators action related to Fannie Mae and Freddie Mac.
Marketwatch 5:44 AM EST
“GSE plan limits risk for E.U. lenders, but write-backs unlikely”
a few notable quotes:
“Another analyst, who didn’t want to be named, said the deal also provides some relief for banks that hold bonds in other major financial groups. There had been a lingering fear that bond-holders could have to take further massive write-downs if a major bank went bust, but the Fannie and Freddie deal confirms any significant bank that might go bankrupt can rely on the state, he said.”
“Merrill argued that any solution to the credit crisis needs to take the approach that it is a systemic problem. That could be through the creation of an entity designed to facilitate consolidation, such as the Resolution Trust Co. in the 1980s crisis.”
“You always, I notice, feel the same when you are under heavy fire–not so much afraid of being hit as afraid because you don’t know _where_ you will be hit. You are wondering all the while just where the bullet will nip you, and it gives your whole body a most unpleasant sensitiveness.” –Orwell, Homage to Catalonia
Unpleasant sensitiveness all weekend.
A “hairy Paulson” that is.
Look to TSYS rather than stocks
Paulson put the grenade in Tys front pocket with the “bazooka” requisition.
He reached around and pulled the pin this weekend.
The endgame is now.
The risk remains. It doesnt magically disappear. It sits in the bond market now. The last and worst place it can go.
Heads up. This ‘bailout’ just triggered $1.47 TRILLION in Credit Default Swaps on Fannie and Freddie.
The clowns that wrote these CDSs are probably dead. No way this is spread out enough over the entire system to avoid at least some implosions…
Fannie and Freddie: CDSs, $1.47 Trillion Triggered
Between Fannie and Freddie, they own about 5 trillion dollars of mortgage assets.
In the words of Paulson, that this crisis ranks next to the Great Depression, 300 billion is small change.
Assuming a conservative 20% write down, the losses could easily exceed 1 trillion dollars.
http://jeflin.net
$300 billion? A small price to pay to keep the Chinese happy.
Especially since they’re the ones we’ll borrow it from.
This is not about breaking China, but saving China – as a prop to the failing US economy. They invest significant amounts of capital in FanFred. When China recently cut its purchase by roughly 25%, Paulson had no choice but to guarantee (at least symbolically) those investments. He got the message.