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The Sky May Actully Be Falling
Old 07-13-2008, 11:17 PM   #1
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The Sky May Actully Be Falling

Just checking in on a free hotel computer from Dawson Creek BC, on my way further north. Caught the news that Fannie & Freddie are getting bailed out, $5T (yes T) in assets at issue. Don't know what it all means but the market could be interesting tomorrow depending on how this is viewed. Breadlines next?

By the way, I'm still buying occasionally so maybe this will be an opportunity,could be the bottom soon as folks could certainly panic on this one.
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Old 07-13-2008, 11:59 PM   #2
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The latest line is that the Treasury department is frantically attempting to "shore up confidence" in the financial markets by announcing a drive to persuade congress to approve an increase in the line of credit for FNMA and Freddie Mac.

Treasury and Fed Pledge Aid For Ailing Mortgage Giants - WSJ.com
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Old 07-14-2008, 12:10 AM   #3
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I'll admit this news is the first where I haven't rolled my eyes - completely - at the doomsday reactions. I'm still not stocking up on ammo and k-rations but I took notice. I may be gritting my teeth and mumbling "buying opportunity, dollar cost average" all week long.
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Old 07-14-2008, 12:14 AM   #4
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It depends on what your definition of "bailed out" is.

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Old 07-14-2008, 12:21 AM   #5
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Considering their role in the markets, failure isn't an option. Talk about credit crunch if that happend.
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Old 07-14-2008, 12:29 AM   #6
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The sky might be falling, but it has fallen worse before even in relatively recent history:
http://www.nytimes.com/2008/07/14/business/14bank.html

Quote:
The nation’s banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.
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Old 07-14-2008, 12:43 AM   #7
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Considering that Fannie and Freddie were intially created by the US government in order to foster a liquid mortgage market and enable average Joe to buy a home, it would be ridiculous for the same government to stand by and do nothing while these companies faltered and became impaired to continue to issue mortgage backed notes.

It's been a wild ride, and the panic has seemed ridiculous when the default rates on Fannie and Freddie mortgages are at only 0.8% in one case, and 1.2% in another. Yet the equity markets have become totally panicked on these companies, coming to believe that the Bush government would allow shareholder equity in these companies to be wiped out. There has been quite a little ideological war going on between the markets and the Bush goverment's desire to somehow distance themselves from the "implied" government backing of these agencies. This has resulted in the equity of these companies going into free fall.

The Bush government finally blinked.

Since Freddie needs to auction notes on Monday to continue it's role as a mortgage provider, the government had to at least provide some confidence that it would facilitate whatever was needed to allow these agencies to continue their traditional role.

Anything else would shut down the mortgage market far worse than the subprime fiasco ever did.

It's been yet another wild confidence game (in the literal sense).

It's probably true that there are things about the Fannie and Freddie structure that could be improved, and it does seem odd that they operate as private companies with shareholders getting the benefits of taking risks, yet the US taxpayer potentially ultimately liable for the downside, but the whole process to get to this point seemed like a pretty insane drama.

Audrey
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Highly Unusual
Old 07-14-2008, 01:29 AM   #8
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Highly Unusual

" The sweeping measures to restore confidence in Fannie and Freddie — and the housing market in general — came ahead of a critical attempt by Freddie to borrow $3 billion from Wall Street today. The Government worked furiously behind the scenes over the weekend to ensure that Freddie Mac is able to sell the $3 billion of short-term debt in the group in a “Dutch auction” today — and at an acceptable interest rate. Treasury officials took the highly unusual step of calling leading banks and urging them to buy Freddie’s debt."

The Times
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Old 07-14-2008, 05:03 AM   #9
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Correct me if I'm wrong, but I took the news to mean that they're extending their line of credit, not actually bailing them out.

From U.S. plan to save Fannie and Freddie - Jul. 13, 2008

"While they now have access to the Fed funds, the companies likely won't need to use the privilege at this time, said Art Hogan, chief market analyst at Jefferies & Co. in New York. But the move will give investors additional confidence that Freddie and Fannie can tap the pool of liquidity backed by the federal government."
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Old 07-14-2008, 07:16 AM   #10
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How about Indymac's failure on Friday? It is estimated that over 10,000 people will lose money after the insurance payments. Do you think that might start a run on other banks? I would think that most people wouldn't want to have more than $100K in any particular bank.
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Old 07-14-2008, 07:52 AM   #11
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How about Indymac's failure on Friday? It is estimated that over 10,000 people will lose money after the insurance payments. Do you think that might start a run on other banks? I would think that most people wouldn't want to have more than $100K in any particular bank.

I don't know, the majority of the largest banks (by assets) do not seem like they will go UNDER... just that they will need to tighten lending practices and have a rough year. I do not fully know though, but I certainly do not see a run on banks.
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Old 07-14-2008, 07:56 AM   #12
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The sky is just not falling. Babe say it ain't so. There is a plan. Living in what has been declared the poorest city, the worst hit by the foreclosure crisis, another policeman killed at a rate of once every three months, innocent bystanders killed every other day, most recently a mailman getting ready for bed shot by stray bullet in gang shoot out, averaging two murders per day in the metro area, rampant embezellment and politcal patronage.

What sky, can't leave the basement of the house anymore. But they are spending $15 million to put trees around the Cleveland federal building and art work. Pretty soon I think you will see the headlines:

"AHBUDAHBI WORLD FINANCIAL CENTER DECLARES U.S. DOLLAR ALL BUT WORTHLESS"

"BABY PICTURES SOLD FOR $15.6 MILLION DOLLARS"

"KING OF BEERS GOES FOREIGN"

"CLEVELAND 1970's ELECTION OF FIRST MAJOR CITY BLACK MAYOR PAVED WAY FOR OBAMA PRESIDENTIAL RUN"

"BRAD AND ANGOLINA TAKEN TO GITTMO, FUTURE BABIES TO BE SEIZED TO BAIL OUT US ECONOMY"

See, I just new THEY had a plan.

"ALFRED E NEUMAN FINALLY ELECTED ON 'WHAT? ME WORRY? PLATFORM'"

Just keep laughing all the way to every we are going.
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Old 07-14-2008, 07:58 AM   #13
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Originally Posted by CitricAcid View Post
I don't know, the majority of the largest banks (by assets) do not seem like they will go UNDER... just that they will need to tighten lending practices and have a rough year. I do not fully know though, but I certainly do not see a run on banks.
Particularly if you are under the 100k limits.
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Old 07-14-2008, 08:05 AM   #14
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Hey, this is market madness.

Remember 1982, and the Latin American debt crisis?

Well that little number triggered defaults on loans worth well over 100% of the total equity of banks such as Citicorp, Chase Manhattan, Lloyds, and Deutsche. Despite these credit losses banks were able to finance a 20 year global expansion.

Just because this time around it's USA bankers who've discovered new and interesting ways to lose money doesn't mean the sky's falling in.
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Old 07-14-2008, 08:10 AM   #15
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I expect the market to soar to record high levels today.

In fact, in a sudden fit of selflessness I took action to make absolutely sure that the market would leap upwards. Friday I bought equities but unfortunately bought them too late, so that the transaction can't go through until closing today.

That virtually guarantees a nice peak in the Dow today.
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Old 07-14-2008, 08:14 AM   #16
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Looks like 09 will be the year. Massive bank asset auctions to liquidate the REOs and OREOs. Save your pennies, it'll be one of the best real estate opportuinties in our life time.
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Old 07-14-2008, 08:30 AM   #17
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Hey, this is market madness.

Remember 1982, and the Latin American debt crisis?

Well that little number triggered defaults on loans worth well over 100% of the total equity of banks such as Citicorp, Chase Manhattan, Lloyds, and Deutsche. Despite these credit losses banks were able to finance a 20 year global expansion.

Just because this time around it's USA bankers who've discovered new and interesting ways to lose money doesn't mean the sky's falling in.
US banks seem to lose amazing amounts of money once a decade on an almost precise schedule. fascinating
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Old 07-14-2008, 08:40 AM   #18
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Originally Posted by audreyh1 View Post
Considering that Fannie and Freddie were intially created by the US government in order to foster a liquid mortgage market and enable average Joe to buy a home, it would be ridiculous for the same government to stand by and do nothing while these companies faltered and became impaired to continue to issue mortgage backed notes.

It's been a wild ride, and the panic has seemed ridiculous when the default rates on Fannie and Freddie mortgages are at only 0.8% in one case, and 1.2% in another. Yet the equity markets have become totally panicked on these companies, coming to believe that the Bush government would allow shareholder equity in these companies to be wiped out. There has been quite a little ideological war going on between the markets and the Bush goverment's desire to somehow distance themselves from the "implied" government backing of these agencies. This has resulted in the equity of these companies going into free fall.

The Bush government finally blinked.

Since Freddie needs to auction notes on Monday to continue it's role as a mortgage provider, the government had to at least provide some confidence that it would facilitate whatever was needed to allow these agencies to continue their traditional role.

Anything else would shut down the mortgage market far worse than the subprime fiasco ever did.

It's been yet another wild confidence game (in the literal sense).

It's probably true that there are things about the Fannie and Freddie structure that could be improved, and it does seem odd that they operate as private companies with shareholders getting the benefits of taking risks, yet the US taxpayer potentially ultimately liable for the downside, but the whole process to get to this point seemed like a pretty insane drama.

Audrey
Wow, you said exactly what I have been thinking about this. FWIW, I think the whole thing is a manufactured problem with no basis in reality.

Oh, and I think this may indicate a bottom, at least for now.
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Old 07-14-2008, 08:59 AM   #19
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. . . and it does seem odd that they operate as private companies with shareholders getting the benefits of taking risks, yet the US taxpayer potentially ultimately liable for the downside, but the whole process to get to this point seemed like a pretty insane drama.
Audrey
So, are the traders rushing in to buy the beaten-down stocks of Fannie and Freddy now that the last smidgen of doubt concerning the federal safety net has been removed? Sure, the Fed's don't guarantee the stock price, but surely this lowers the perceived risk of their business model.

And, while we're on the subject, why is the FDIC a "corporation"? Doesn't some of this stuff fall into the category of "inherently governmental" tasks?
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Old 07-14-2008, 09:27 AM   #20
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So, are the traders rushing in to buy the beaten-down stocks of Fannie and Freddy now that the last smidgen of doubt concerning the federal safety net has been removed? Sure, the Fed's don't guarantee the stock price, but surely this lowers the perceived risk of their business model.

And, while we're on the subject, why is the FDIC a "corporation"? Doesn't some of this stuff fall into the category of "inherently governmental" tasks?
Perhaps you are assuming that government organization is designed in a logical way.
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