Stop The Mortgage Bailout

This site and this 'movement' is in its infancy but this is the ONLY way to avoid another Lost Decade. This is the ONLY way to avoid Japan v2.0.

Stop The Mortgage Bailout

Short Entry Zones Were Damn Near Perfect

In March 24th, 2008 in my post Short Covering on Bear, Goldie, Lehman, Fannie and Freddie I tried to determine just how some of these beaten down names would bounce. I also looked for good short entry points. I must say: DAMN NEAR PERFECTLY TIMED.

Fannie, Freddie May Raise $20 Billion, Regulator Says (Update1): “Fannie Mae and Freddie Mac, the U.S. government-chartered mortgage companies, may raise as much as $20 billion in capital as part of an agreement that allows them to buy more debt securities, their regulator said.”

The market might view this crap as Bullish… but reality will eventually sink in. COMMON shareholders WILL GET WIPED OUT as there will be MANY such capital raises in the coming months and years by FNM and FRE. COMMON shareholders will get owned. FNM and FRE investors can then go hang out with Thornburg Mortgage (TMA) bagholders at the bar and drink their rage and sorrow away together. The final deal, and this could be years down the road, for FNM and FRE will be similar to the current TMA deal. COMMON shareholders will get 10% of the company at most and instead of preferred shares and convertibles, the GOVERNMENT will step in directly. I suppose that if anybody can get their money out of these names, it would be the BONDHOLERS as the government would not let the debt go into default (a la Bear Stearns).

This is ALREADY their second visit to the capital markets:

“Fannie Mae, based in Washington, raised $7 billion in December by selling preferred stock. McLean, Virginia-based Freddie Mac sold $6 billion a month earlier.”

Right now they can’t even be sure that they COULD raise more capital. That’s why they don’t even know HOW they’ll go about it yet:

“The companies didn't say last week how or when they would raise the additional capital.”

How funny is it that bagholders (that would be YOU poor bastard taxpayers) are currently upset about the taxpayer backed Bear Stearns (BSC) bailout? Cuz, this one is going to be OH SO MUCH BIGGER (eventually).

Related Posts:
Bear Stearns: Bagholders Start to Agitate
Thornburg Mortgage: Pyrrhic Rescue
Sarcastic Rant on Fannie and Freddie
Bear Stearns is Dead, Lehman is Probably Next

The Lost Decade

They caught these charts from the Wall Street Journal (WSJ) over at The Big Picture. The full WJS article: Stocks Tarnished by 'Lost Decade'. I first posted about “The Lost Decade” in my September 24th, 2007 pos The 11th Hour. I’ve re-posted the updated chart today.

“The Fed had a simple choice: INFLATE or DO NOTHING. Had the Fed done nothing the housing market and therefore the economy as a whole would have CORRECTED by falling into a MANAGEABLE and DESERVED recession. Instead the Fed chose to cut rates and add liquidity. In other words: INFLATE the entire system. The ultimate results will still be a recession. Only now the recession may have been postponed, possibly for years, and when it does hit it will be neither MANAGEABLE nor MILD.” –TheFinancialNinja, The 11th Hour, 09/24/07

What I overlooked at the time, is the significant DELETRIOUS effect on money supply that the wholesale DESTRUCTION of credit will have. Although the Fed will try to inflate, I do not think they will be able to. I’m firmly in the DEFLATION CAMP.

Notice how RATE OF CHANGE in the monetary base is decreasing rapidly? (Source: Federal Reserve Bank of St. Louis) The monetary base is set to go into CONTRACTION, much like after the Tech Bubble burst in 2000… only much much worse and for much much longer.

$$
$Now $
$ Hear This: $
$ Money is debt. $
$ No debt, no money. $
$ Less debt, less money. $
$ Less money, less inflation. $
$ Even less money, is deflation. $
$ Because $
$ "Inflation is always and everywhere $
$ A monetary phenomenon." $
MiltonFriedman

(Money Tree from Sudden Debt)

The Lost Decade refers to:

-The post-war period in Britain from 1945-1955.

-The 1980s in Latin America, as the area experienced a significant economic depression due to the two oil crises of 1973 and 1979. In addition, fluctuating interest rates on lending agreements went up following these oil price shocks. The supply of U.S. dollars in the international financial markets, broadly available after World War II, was channeled into OPEC countries when the oil prices went up in the 1970s. The reduced supply of dollars in the international debt markets has pushed interest rates up on debt agreements. This chain of events has contributed to a major increase in the international debt in Latin American countries in the 1970s and 1980s.

-The 1990s in Japan, following the collapse of the Japanese asset price bubble.

Soon, America will join that list.

Related Posts:
Really Scar Fed Charts, Why Bernanke Will Furiously Cut
Commodities Unravel, Confidence Collapses

Bear Stearns: Bagholders Start to Agitate

The bagholders, that would be YOU the diligent TAXPAYER, have started to agitate.

Protesters Enter Bear Stearns Lobby, Demand Meeting With Dimon: “Bear Stearns Cos.' New York headquarters was entered by about 200 people protesting the U.S. government's role in the securities firm's sale to JPMorgan Chase & Co.

Demonstrators from the Neighborhood Assistance Corp. of America streamed into the midtown Manhattan building's lobby through a rear entrance after security guards tried to keep them from using revolving doors. The group demanded to meet with JPMorgan Chief Executive Officer Jamie Dimon, chanting “We want Dimon.” They left voluntarily after about a half-hour.

“It's a taxpayer bailout,” Bruce Marks, the Boston-based nonprofit group's CEO, said of the Bear Stearns sale in an interview today. “You've got to take the people who created the mortgage crisis'' and have them fix it.”

My favorite quote comes from a Reuteres article. When a protester argued that the average American homeowner should have been bailed out, not the reckless fat cats at Bear Stearns, a Bear Stearns employee SCREAMED back at the protester:

“Homeowners, that's more than $1 trillion (in mortgage debt), you're crazy.”

Smelling some political points or a MASSIVE POLITICAL LANDMINE, especially in an election year, the Senate Banking and Finance committees have decided they better take a closer look.

Bear Stearns Sale to JPMorgan to Be Probed by Senate (Update4): “The Senate Banking and Finance committees are probing the government-backed sale of Bear Stearns Cos. to JPMorgan Chase & Co., voicing concerns about the risk posed to taxpayers from federal involvement in the deal.”

This is good ASS-COVERING behavior. Politicians can safely say, “We are looking into it.” Then IF the agitations become true RAGE and things get politically dicey, they can say, “We’re on it and we will take corrective measures.” But if the bagholders loose interest and loose focus or simply have to turn their attentions to more pressing matters, such as finding a new job, then the committee will drag on just long enough to fade from memory.

“It's some pushback from Congress to send a warning shot to the Fed to not use taxpayer resources to bail out Wall Street. If there is a significant negative response from Congress, it would deter the Fed from doing this in the future.” -Andy Laperriere, managing director at International Strategy & Investment Group in Washington.

“The question is how much of a risk has the government taken in extending this loan, and that's fully dependent on the value of the collateral” -Gilbert Schwartz, a partner at the law firm of Schwartz & Ballen in Washington and a former Fed lawyer.

At 2:45 PM there was a massive price spike in Bear Stearns (BSC). The price did a moonshot, 20% in 15 minutes on a rumor that a new higher bid was in the works. The deal is done at $10. Bears Stearns is worth exactly ZERO. Take the $10.

A smaller version of that same spike occurred in the S&P as well. Rumors about Bears Stearns somehow translates into a MASSIVE change in the value of exactly 500 of the largest corporate titans. Traders shoot first and hardly ask any questions. Not even later.

Fun AND profitable should you be nimble enough… but downright crazy if you take a step back and look at the bigger picture.

Also, somebody please teach me how to start these UBER rumors. They look like EASY MONEY.

Related Posts:
Thornburg Mortgage: Pyrrhic Rescue
Sarcastic Rant on Fannie and Freddie
Bear Stearns is Dead, Lehman is Probably Next

Thornburg Mortgage: Pyrrhic Rescue

This is almost funny…

Thornburg Offers $1.35 Billion of Debt Paying 18% (Update7): “Thornburg Mortgage Inc., the “jumbo” mortgage lender trying to stave off bankruptcy, rose by more than a third after disclosing plans to raise $1.35 billion.”

Well, a RESCUE plan would indeed be good for a company that is effectively bankrupt and out of business. So a closer look is warranted.

“The rescue plan gives new investors debt that pays 18 percent and the chance to own a 90 percent stake, according to terms of the private placement outlined by Santa Fe, New Mexico- based Thornburg in a statement today.”

The common shareholder is of course wiped out in this rescue. CURRENT shareholders will end up with less than 10% of the company.

New investors are getting a 90% stake in the company AND an 18% yield on their money. This is where things get interesting.

“The sale includes senior subordinated secured notes due to mature in 2015. Terms call for an initial interest rate of 18 percent, falling to 12 percent later if certain conditions are met. The investors also get warrants to buy common stock for a penny a share.”

First of all, the ENTIRE Thornburg Mortgage Inc business model is this: Borrow CHEAPLY, lend DEARLY. They borrow money and then turn around and lend YOU that same money for your JUMBO mortgage. Obviously for this to work they have to be able to borrow at a LOWER rate than what they charge YOU. The SPREAD between the rate they borrow and lend at needs to be large enough for Thornburg to pay its employees and office rent. Naturally, a profit margin is preferred as well.

Borrowing at 18% and lending out sub 5% (see Rates chart) isn’t exactly sustainable. Granted, this money is not intended to be used for new mortgages. The purpose of this money is to meet margin calls on their EXISTING mortgage portfolio.

The company has $34.19 BILLION in debt going into this RESCUE. The company also only generated $309.4 in REVENUE. 18% on $1.35 billion is $243 MILLION in annual interest costs. So this rescue alone will consume 78% of the companies REVENUE. Factor in the servicing costs of the original $34.19 BILLION and the cost of both employees and office rent and you get ONE DEAD COMPANY.

I would call this a PYRRHIC RESCUE. “Victory with devastating cost to the victor.”

Taxpayers May Be Liable for Billions From Bear, Mortgage Rescue: “Even as the Bush administration insists it won't risk public funds in a bailout, American taxpayers may already be liable for billions of dollars stemming from Federal Reserve and Treasury efforts to quell a financial crisis.

History suggests the Fed may not recover some of the almost $30 billion investment in illiquid mortgage securities it received from Bear Stearns Cos., said Joe Mason, a Drexel University professor who has written on banking crises. Treasury's push to have Fannie Mae and Freddie Mac buy more mortgage bonds reduces the capital the government-chartered companies hold in reserve at a time when foreclosures and defaults are surging.”

Hahahaha… TAXPAYERS ARE ALWAYS THE ULTIMATE BAGHOLDERS. Taxpayers are also the BEST bagholders because they are just ignorant enough to muster nothing more than some anemic complaints and protestations AFTER the fact.

Just wait until taxpayers get the bill for Fannie Mae and Freddie Mac, because that one will be in the TRILLIONS.

The S&P couldn’t get past a key level around 1360 after two attempts over two days. Up volume quickly disappeared as the short covering dried up. With the BOTTOM CALLING at a fevered pitch, I rebuilt my short positions at these prices over the last two days.

Money-Market Rates Rise as Central Bank Cash Injections Fail: “The cost of borrowing in dollars and euros rose as central bank efforts to break the squeeze in short-term lending misfired.

The three-month London interbank offered rate, or Libor, for dollars increased 1 basis point to 2.67 percent, the highest level since March 14, the British Bankers' Association said today. The comparable euro rate climbed 2 basis points to 4.72 percent, the highest since Dec. 27.”

Here comes the financial stress… again.

“The difference between the rate banks charge for three- month dollar loans relative to the overnight indexed swap rate showed a decline in the availability of cash today. The so- called Libor-OIS spread widened 4 basis points to 67 basis points. It averaged 8 basis points in the first half of 2007.”

Time for risky assets to curl over and head once again for the edge of the abyss.

Related Posts:
Sarcastic Rant on Fannie and Freddie