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Thursday, August 21, 2008

Fannie and Freddie: Poker, Bazookas and Paulson

“If you've got a squirt gun in your pocket, you probably will have to take it out. If you have a bazooka in your pocket and people know it, you probably won't have to take it out.” –Hank Paulson

Now let’s imagine trading as a giant poker game…

The Market: “Fannie Mae and Freddie Mac fell to new 52 week lows today.”
Translation: CALL.

Hank Paulson: “Our proposal was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac. At the same time, recent developments convinced policymakers and the [firms] that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary.”
Translation: RAISE.

The Market: “Fannie Mae and Freddie Mac both succumbed to increased selling pressure yesterday, making new lows on increased volume. Both firms are struggling as losses mount.”
Translation: RE-RAISE.

Hank Paulson: “If you have a bazooka in your pocket and people know it, you probably won't have to take it out.”
Translation: ALL IN (Pushes a GIANT stack of chips into the middle. Each chip has a stamp on it saying: YOUR TAX DOLLARS.)

The Market: “Shares in Fannie and Freddie, government-chartered companies that together account for almost half the $12 trillion U.S. mortgage market, reached their lowest levels in two decades in New York Stock Exchange composite trading yesterday; their preferred shares have lost about one-third of their value this week. Central banks are also balking, paring purchases of new Fannie and Freddie debt the past two weeks by more than a quarter.”
Translation: CALL (Pushes FNM and FRE to new lows at $3.93 and $2.88 pre-market. Down 20% and 15%.)

Now we wait for the RIVER CARD. The Market is definitely ahead. Heck, Hank is probably drawing dead.

This is one for the history books.

I’ve covered my Using Fannie and Freddie as Disaster Insurance (Update1) positions. Original post is here: Using Fannie Mae and Freddie Mac as Disaster Insurance.
I'm out. Close to zero is good enough for me. Who knows what the donkeys in Washington might try over the weekend...


Anonymous said...

I'm just wondering how quick all this will be when the majority of the people who are busy watching American Idol, Lost, and Deal or No Deal finally see whats happening and there is nothing they can do about it. Sometimes I switch my radio from AM to FM and just think how totally out of touch I might be if I only listened to FM or an IPOD.

It took us years/decades/several generations to get here so somewhat "invisible", I wonder if the deep slide to the trough will be days/weeks/months. Will it basically be like the individual charging, charging, charging and then just leave the house with the unopened mail/bills sitting on the table.

I've read that happens around Atl where the family just leaves with everything still in the house and the unopened bills on the table. The bank has to landfill everything (furniture/pictures/kids trophies) due to liability. They can't even donate stuff to thrift stores, sad. It will be quite scary when that happens on a whole town scale. I guess it already has in the country, I don't think here in middle/upper class Atl yet.

When I drive home, I see dozens of million dollar homes in "high end subdivisions" built in the last 2 years right in the middle of the country on curvy two lane country roads with no artery roads within several miles. All of these homes are for sale, I don't even think they've ever been sold the first time.

As someone who at least I think I can live on the barest necessities (at least 21st Cent barest needs, reading some books on my front porch), it will be interesting to watch these people knocked down several/many pegs to where they should have been living all along. A psychologists/sociologists dream.

Brant, Atl, GA

Anonymous said...

Brant is right. From my experience, 99% of people, even smart, professional people, especially those in RE-related businesses, are completely clueless about how bad things are going to get. But they do know what's going on on America's Got Talent.

Mike Masland said...

I love the poker.... love it.

Anonymous said...

While I hesitate to question the brilliance of the Ninja, I do have to take issue with the poker analogy. In a true poker game, there is value to the chips. In the case of the GSEs, there is no value to the chips or the ultimate prize. If Paulson "wins," the dollar is further devalued and US national debt increases significantly. If the market "wins," then rates on mortgage loans increase dramatically and a housing crisis becomes a housing catastrophe. If the river card is turned, it seems everyone loses.

Anonymous said...

When FRE moved down to 2.50ish I moved my Buy-to-Cover to 3.50. Boy was I surprised to get taken out, though at a nice profit, at the high of the day. No chance to reshort that dead-stock walking.

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