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Wednesday, August 27, 2008

Fannie and Freddie: The Best Trade EVER

via DealBreaker

Trade of The Day: Buy Freddie Paper With Fed Leverage: “We don't know who bought the Freddie notes today. But buyers of Freddie notes who have access to borrowing from the Federal Reserve would have found the decision to bid relatively easy. That's because the ability to exchange the Freddie debt for Fed cash means banks can buy Freddie debt with a huge amount of leverage, dramatically increasing the return on their capital.

Here's how it works. A bank that bought the six month notes from Freddie this morning could also bid to borrow from the Fed's Term Facility, which held an $75 billion auction today. As collateral for the borrowing, the bank could offer the newly purchased Freddie notes, for which the Fed would give them credit for 97% of their market value. Recently, the TAF pricing topped out at 2.35 percent for 28-day borrowing. So a bank buying $100 million of Freddie paper yielding 2.858% could flip it to the Fed, borrowing $97 million at around 2.4% (assuming the pricing will be slightly higher this time around).

At the end of the day, a credit desk could buy $100 million of Freddie debt for just $3 million down. On that $3 million, the desk would receive a 17.7% annualized return, or 8.8% over six months, for paper that is thisclose to being explicitly backed by the Treasury Department. Not a bad deal at all.”

Fun fun fun.

This is EXACTLY what had to happen. That is how liquid markets work. Market participants will find and arbitrage all ‘free money’ away.

In this case it didn’t long and the end result is this: PROFITS are PRIVATIZED and LOSSES are SOCIALIZED.

You see, if this trade goes bad enough, the Fed would just call in the collateral. In this case, for this trade to implode, Fannie and Freddie would have to implode. That also means the collateral would implode. The Fed would then get stuck both bailing out Fannie and Freddie AND holding a pile Fannie and Freddie paper that got ‘put’ to them as collateral.

The Fed would then just turn around and demand the Treasury expand THEIR balance sheet. The Treasury would in turn issue more debt. At the end of this donkey chain is the poor (literally) U.S. taxpayer who gets bent over and rammed…

This will all happen. It almost has to. I bet it happens so quickly and so suddenly the taxpayer will be left confused wondering, “Did I just get raped?”

For WallStreet right now, this is the BEST TRADE EVER. All upside and no downside.


Anonymous said...

Truly stomach turning...the worst kind of hidden subsidy...for "compensate' ruinous behavior no less.
Crony capitalism at its worst.
Throw them all out of office...

Anonymous said...

"I bet it happens so quickly and so suddenly the taxpayer will be left confused wondering, “Did I just get raped?”

I for one knew damn good and well that this was going to be exactly what would happen, it has happened threw out the history of the US and with the bursting of the biggest credit bubble in the history of the world there is no other way. The empire is dying and I fully expect the currency to collapse in an Argentina fashion over the next few years as the debt is monetized. Think I'll sit on the beach and watch the fun.

Anonymous said...

Was Thomas Jefferson psychic?

“I believe that banking institutions are more dangerous to
our liberties than standing armies. If the American people
ever allow private banks to control the issue of their
currency, first by inflation, then by deflation, the banks and
corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Thomas Jefferson, Letter to the Secretary of the Treasury
Albert Gallatin (1802)
3rd president of US (1743 - 1826)

A Proletariat

Anonymous said...

Why is this a surprise baffles me. It all becomes clear when you realize that people running the finances in the government do not work for the tax payers but for wall street...

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