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Sunday, September 7, 2008

Gaaawdammit Paulson! Now You've Done Us All In.

Video: Karl Denniger from MarketTicker

"The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt." -Bertrand Russell

My Comment:

Oh boy oh boy oh boy. The Bulltards are about to walk into the greatest financial ambush ever...

Tomorrow morning equities are gonna fly, especially financials... for how long, I can't even begin to predict. But one thing is for certain. The crash is going to be spectacular.

Yields are screaming higher across the curve as it suddenly becomes very very clear the US debt has at least doubled, if not tripled and more on this bailout. The US dollar is getting whacked across all major FX pairs. Commodities are catching a bid. This is not good for anybody.

By wiping out both common and preferred shares, Paulson has put one hell of a burden on an already cash strapped FDIC. Regional banks that hold Fannie and Freddie preferred shares as part of their capital are being forced to mark-to-market. Already the FDIC is scrambling to catch the banks that will be crushed by this. This coming Bank Failure Friday should be fun indeed.

S&P 500 futures furiously screamed higher overnight and spent most of their time around 1265. If you recall that was the critical support level that only just broke last Thursday... (The Bear Wedge) Further resistance is around 1300 and 1310.

Treasuries Tumble After U.S. Takes Control of Fannie, Freddie: "Treasuries fell the most in almost two months as the government takeover of Fannie Mae and Freddie Mac gave investors confidence to buy higher-yielding assets.

Notes slid for a second day after the U.S. government seized control of Fannie and Freddie, the two biggest mortgage finance companies, seeking to pull the U.S. housing market out of a recession. The bailout will help the economy and lead to increased Treasury borrowing, economists at Goldman Sachs Group Inc. led by Jan Hatzius wrote to clients."

Paulson Engineers U.S. Takeover of Fannie, Freddie (Update4): "The U.S. government seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

The FHFA will take over Fannie and Freddie under a so- called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury can purchase up to $100 billion of a special class of stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on its stake.
As a condition for the assistance, Fannie and Freddie eventually will have to reduce their holdings of mortgages and securities backed by home loans.

Banks and insurance companies have typically purchased the two companies' preferred shares. The Federal Reserve and three other bank regulators said that they will work to "develop capital restoration plans'' with the "limited number'' of smaller institutions that hold Fannie and Freddie stock as a significant portion of their capital."


GTM said...

Thanks for helping me better understand the market. I quoted you on the following story.

TLT Points to a Market Rally:

Rebecca Wilder said...

This is what Bernanke said:

"These necessary steps [nationalizing Fannie and Freddie] will help to strengthen the U.S. housing market and promote stability in our financial markets."

I totally agree with you, markets will rally, but there are likely problems ahead. I guess that the bailout had to happen in order to avoid a collapse in the US housing market, but moral hazard issues aside, stability in the financial markets, especially in the bond market where corporate spreads are already surging, is far from certain.

Great post, Rebecca

Anonymous said...

It's no longer TGIF friday. It's now FDIC fridays.

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