Freddie, Ambac, Morgan: This is the Sound of Credit Crunch

This is the sound of CREDIT CRUNCH…

Morgan Stanley Said to Freeze Home-Equity Credit Withdrawals: “Morgan Stanley, the second-biggest U.S. securities firm, told thousands of clients this week that they won't be allowed to withdraw money on their home-equity credit lines, said a person familiar with the situation.

Most of the clients had properties that have lost value, according to the person, who declined to be identified because the information isn't public. The New York-based investment bank will review home-equity lines of credit, or HELOCs, monthly from now on, the person said yesterday.

Wall Street firms including Morgan Stanley are ratcheting back on risks after the collapse of the subprime mortgage market and ensuing credit contraction saddled banks and brokerages with almost $500 billion of writedowns and losses. Consumers fell behind on home-equity credit lines at the fastest pace in two decades in the first quarter, the American Bankers Association reported last month.”

I really love how these guys are cutting back AFTER the bubble has burst and residential real estate prices have plunged. Go RISK MANAGEMENT!

“JPMorgan Chase & Co., the second-biggest U.S. bank by market value after Bank of America Corp., has notified 150,000 customers about changes in their home-equity lines of credit since March, said Christine Holevas, a Chicago-based spokeswoman.

Bank of America and Washington Mutual Inc. are among the other lenders that have frozen home-equity credit lines this year.”

I also really love how the Fed is flooding the financial system with liquidity as the banks are draining the system of liquidity. Everything is being scaled back or outright suspended, from credit cards to mortgages and business loans. With net credit rapidly contracting, there can’t be an economic recovery of any significance. Considering that this last ‘boom’ cycle was fueled almost entirely by cheap access to credit, expect the GLOBAL economy to deteriorate rapidly over the very near future.

A rapid credit contraction will translate into a continued ass kicking over at Fannie Mae (FNM) and Freddie Mac (FRE).

Freddie Mac Posts Fourth Straight Loss, Cuts Dividend (Update2): “Freddie Mac, the U.S. mortgage-finance company hobbled by record foreclosures, will slash its dividend at least 80 percent after posting a quarterly loss that was three times wider than analysts' estimates.

The second-quarter net loss of $821 million, or $1.63 a share, compares with the 54-cent a share average estimate of nine analysts in a Bloomberg survey. The common-share dividend will be reduced to 5 cents or less from 25 cents, McLean, Virginia-based Freddie said today in a statement.

Freddie had credit-related expenses of $2.8 billion, double the first quarter, and wrote down the value of subprime and low- quality mortgage securities by $1 billion as the biggest housing slump since the Great Depression increased delinquencies.”

Does a write down of $1 billion on “low quality mortgage securities” seem small to anybody else? Freddie owns or guarantees $2.2 trillion in mortgages…

I guess Freddie is super hedged, or has the best low quality mortgages ever. OR, they wrote everything down already because they were super honest and super conservative.

Freddie Mac (FRE) reported crappy earnings.

This last short covering bounce on the whole "no more naked shorts" scare closed the gap. Prices are hovering around support around $7.50. Failure here (likely) will result in a test of the lows where Paulson will step in nationalize the whole damn thing...

Fannie Mae reports tomorrow…

Ambac Posts $823 Million Net Income; CDO Losses Rise (Update1): “Ambac Financial Group Inc., the bond insurer that lost 92 percent of its stock market value in the past year, posted second-quarter net income after recording a gain related to its debt securities.

Net income rose to $823.1 million, or $2.80 a share, from $173 million, or $1.67, a year earlier, New York-based Ambac said in statement today. Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53 a share because of expected claims on collateralized debt obligations, compared with an average estimate for a loss of 61 cents from five analysts surveyed by Bloomberg.”

Wait! What? Ambac (ABK) reported an INCREASE in net income? WTF? Lemme take a closer look.

Oh wait. It’s just another accounting scam. Phew! For a second there I thought there was real cash flow going on…

“A rise in the risk premiums on Ambac's own debt in the second quarter lowered the value of bond guarantees the company has outstanding, which was allowed to be reflected as a gain under accounting rules introduced in the first quarter.”

So, this is what REALLY happened: “Excluding gains and other changes in the value of securities it holds and insures, Ambac had a loss of $1.53 a share because of expected claims on collateralized debt obligations…”

Ambac (ABK) has bounced almost 500%. Talk about short squeeze. This bounce should just about be done here at resistance around the $5.00 area. I don't advocate shorting stocks like these. Trading them intraday is one thing. Holding positions overnight on 'crack stocks' like ABK is quite another.