In order to understand the current market turmoil it is important to look at the history behind the two largest government sponsored entities (GSEs), the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae was founded as a government agency, part of FDR’s New Deal in 1938 during the Great Depression to provide a secondary market for mortgages and to also provide liquidity to the mortgage market. The longer term fully amortized loan products were an innovation at the time.
The birth of Fannie Mae came at a time that was riddled with bank failures. During the 1930s bank after bank failed on bad loans and foreclosures skyrocketed. As documented by painful stories of people losing their homes during the Great Depression, this was the climate that bred Fannie Mae. The essence of Fannie Mae was to provide a larger incentive for homeownership. Keep in mind that in 1940 the homeownership rate was 44 percent. Measure that up with the peak of 69 percent in 2004.
As it turned out, the idea of a longer term fixed mortgage took hold and Fannie Mae served its purpose of providing liquidity for the next 30 long years. In fact, Fannie Mae held monopoly status on the secondary mortgage market all the way up until 1968. In 1968 Fannie Mae was converted into a private corporation. This is where I think much confusion lies in whether these are government agencies or private enterprises. Well, for 30 long years Fannie Mae was a government agency.
Fannie Mae’s primary method of making money is by charging a guarantee fee on loans it securitizes into MBS bonds. Investors assume that Fannie Mae takes on the risk and they get to keep this fee. The underlying assumption, at least from investors in these bonds, is that the principal and interest on the mortgages will be paid regardless of whether the actual homeowner pays.
In 1970 to expand the secondary mortgage market and end Fannie Mae’s monopoly on the secondary mortgage market, Congress chartered Freddie Mac as a private corporation to provide competition. Freddie Mac’s primary revenue stream and business model is nearly identical to that of Fannie Mae. Both GSE’s are only allowed to purchase conforming loans which is a reason why the current legislation battle and lifting of caps has been such a big issue over the past few years. During the boom, that is where other institutions jumped in with non-conforming loans such as Pay Option ARMs and jumbo loans that did not find a market and created a speculative fever. In fact, during the past decade Fannie Mae and Freddie Mac started losing a significant share of the mortgage market.
If you are curious to see how this market dislocation occurred, here is a snapshot of how the jumbo market for the first half of 2007:
As you can see, the non-jumbo market was rather bland and vanilla looking while the non-jumbo market is where much of the problems occurred. The push right now and the overwhelming mantra is to provide further liquidity. The market is in need of credit Drano and even with the current housing bailout bill which looks like it will pass, the idea was that Fannie Mae and Freddie Mac would be ready to saddle up to increase liquidity in the secondary market. The only problem is, Fannie Mae and Freddie Mac both may be the one’s in need of liquidity:
What would cause such a market punishment for these two government sponsored entities? Well earlier in the week it was thrown out by former St. Louis Federal Reserve President William Poole that these two may actually be insolvent:
“(Reuters) Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole was quoted as saying in an interview held on Wednesday.
Chances are increasing that the government may need to bail out the two mortgage companies, Poole was quoted as saying.
Shares of the two companies have taken a beating recently on worries about whether they can withstand more losses and support housing as well as concerns that they may need to raise massive amounts of new capital.”
The problem with this sent many official including U.S. Treasury Secretary Hank Paulson to say that a government takeover of Fannie Mae and Freddie Mac would not be necessary. As the market kept pummeling shares of Fannie Mae and Freddie Mac, Ben Bernanke stepped in and did the following:
“(MarketWatch) Typically, the Fed has acted as a lender of last resort only for commercial banks. But the Fed has authority to lend to almost anyone, if the Fed Board of Governors agrees that conditions are dire enough.
Earlier this year, the Fed board voted to open up its discount window (where it makes cheap loans to banks) to the investment banks. The Fed even created a special entity to hold the especially toxic assets from the Bear Stearns fire sale.
Under Fed regulations, regional Fed banks can offer loans to any “individual, partnership, or corporation” under “unusual and exigent circumstances” but only “if, in the judgment of the Federal Reserve Bank, credit is not available from other sources and failure to obtain such credit would adversely affect the economy.”
There’s no indication that Fannie or Freddie have asked to borrow money from the Fed, or that the Fed board has voted to authorize any loans.
Bernanke’s statement isn’t an indication that Fannie or Freddie will be going to the discount window any time soon. It’s really more like a letter from the fire department saying that of course they’d come if there were a fire.
Arsonists, take note.”
This action sent stocks from being down over 240 points to actually bringing them in the positive! Yet as the day went on, the market ended lower by 128 points and Fannie Mae and Freddie Mac still got hammered, just not as bad. This kind of volatility is similar to what occurred in October of 1929 with big figures launching out last minute efforts:
“At about half-past one o’clock Richard Whitney, vice-president of the Exchange who usually acted as floor broker for the Morgan interests, went into the “steel crowd” and put in a bid of 205 — the price of the last previous sale — for 10,000 shares of Steel. He bought only 200 shares and left the remainder of the order with the specialist. Mr. Whitney then went to various other points on the floor, and offered the price of the last previous sale for 10,000 shares of each of fifteen or twenty other stocks, reporting what was sold to him at that price and leaving the remainder of the order with the specialist. In short the space of a few minutes Mr. Whitney offered to purchase something in the neighborhood of twenty or thirty million dollars’ worth of stock. Purchases of this magnitude are not undertaken by Tom, Dick, and Harry; it was clear Mr. Whitney represented the bankers’ pool.
The desperate remedy worked.The semblance of confidence returned. Prices held steady for a while; and though many of them slid off once more in the final hour, the net results for the day might well have been worse. Steel actually closed two points higher than on Wednesday, and the net losses of most of the other leading securities amounted to less than ten points apiece for the whole day’s trading.”
We don’t have mighty men like a Whitney or Morgan on Wall Street today. Buffet carries the same power but he isn’t planning on stepping in given that his Berkshire Hathaway is down a stunning 17% for the year (for forty years, his worst yearly return was -6.2% in 2001). This action stunted the market for a bit but the implicit guarantee of the GSEs will now be put to the test.
The sheer size of the GSEs is daunting. Combined, Fannie Mae and Freddie Mac have over $5.1 trillion in debt through MBS and debt:
This is larger than the size of the United States publicly held debt. If the government were to take on the GSEs this would not only jeopardize our financial security, it may damage our country’s credit rating (what is left of it)!
Given that the secondary market has frozen over the past year, there has been a push to increase the size and scope of the GSEs but the problem is that they are already way too big. Increasing them will only further create the problem that got us here. They are no longer solvent. Their combined market cap is $15 billion and they are linked to $5.1 trillion in debt. The Case-Shiller index already shows that the United States is down over 15% on a year over year basis. Given that the market real estate peak was somewhere at $23 trillion, $3.45 trillion in equity has evaporated! Estimates tell us that housing nationwide will fall an additional 10 to 15 percent meaning $2 to $3 trillion more in equity is going to vanish.
That is why this story is so perilous. If you think Bear Stearns was a big deal you have seen nothing should Fannie Mae and Freddie Mac continue on this path. Unless housing miraculously goes positive, I simply do not see how the government doesn’t nationalize these two. The fact that the Fed has already opened the door to the credit swap meet tells us there are major problems here. There is a fantastic article in Vanity Fair talking about the entire Bear Stearns boondoggle:
“(Vanity Fair) The first team of Morgan executives reached Bear’s sixth-floor executive suite around 11 that night. It didn’t take long for them to realize the danger in what they were being asked to do. If Dimon lent Bear $15 billion or so and the firm imploded the next day, they could lose it all. A little after midnight Dimon told Schwartz in a phone call, “We’ve got to get the Fed in on this.”
Downtown, Tim Geithner was waiting when Dimon telephoned. Any bailout, Dimon reiterated, was too big, too risky, for Morgan to handle alone. Both men knew that meant only one thing: somehow Bear had to be given access to the Fed “window,” that is, the spigot of cash that was available to the nation’s commercial banks, but not its investment banks. The only way for the Fed to help, to give Bear access to the “window,” was to lend Morgan the money, allowing the bank to act as a bridge across which the Fed cash could stream into Bear’s vaults.
Geithner, quickly grasping the wisdom of the move, got on the phone with Washington, going through the details with the Fed’s chairman, Ben Bernanke, and the Treasury secretary, Hank Paulson, and his counterparts at the S.E.C. If they could just get Bear through the next day, perhaps a bigger and better deal could be forged over the weekend. By two a.m. teams from the Fed and the S.E.C. had joined the Morgan bankers at Bear, poring over the numbers. In Molinaro’s conference room, Schwartz and Molinaro paced, occasionally taking bites of cold pizza; their fate, they now realized, was largely out of their hands.”
Now how much did that Bear Stearns bailout help our economy? It didn’t. If anything it allowed Wall Street firms to off load toxic waste onto the public while a few Wall Street firms lived to see another day. Now, they want to shovel more toxic waste onto the government via Fannie Mae and Freddie Mac through the new housing bailout but the only problem is, Fannie and Freddie already have a ton of toxicity in their folders! The end game is quickly approaching and the volatility of today should make you keep your powder try. Bernanke allowing Fannie and Freddie to come to the window is like calling out, “5,000,000 shares of GM at $20.” Alas there are no giants in our current economy.
Amazon.com (NASDAQ:AMZN) is recently down $1.58 to $66.96. AMZN is scheduled to announce Q2 EPS on July 23. Cowen has a Neutral rating on AMZN. AMZN call option volume of 14,514 contracts compares to put volume of 51,866 contracts. AMZN August option implied volatility of 81 is above its 26-week average of 50 according to Track Data, suggesting hedging for downside price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Nearly two years after Google Inc. (NASDAQ: GOOG) bought YouTube for over $1.6 billion, it seems that it is not the cash cow Google had hoped it could become. Getting ad revenue from YouTube, The Wall Street Journal says, is not an easy task. Despite the site’s popularity with surfers, it isn’t popular with big corporate advertisers. World-wide revenue from YouTube ads is likely to total about $200 million for the full year, less than Google’s expectation. Google has been trying to show it is not a one-trick pony, YouTube was critical in that.
According to The New York Post, “A blind trust run by Mayor Bloomberg is willing to pay between $4.5 billion and $5 billion to buy Merrill Lynch (NYSE: MER)’s 20 percent stake in Bloomberg LP.”
If you missed it Tuesday, VMware (NYSE: VMW) sank over 24%, taking EMC Corp. (NYSE: EMC) shares down 11% with it. The drop is attributed to two main issues, “VMware’s warning that revenue for the current year will fall short of expectations,” and doubt “EMC would spin out the remainder of VMware’s shares.” But this morning, after the abrupt replacement of co-founder and CEO Diane Greene by former Microsoft Corp. official Paul Maritz, Wall Street still doesn’t seem to be fully satisfied.
According to Bloomberg, Raytheon Co. (NYSE: RTN), maker of the Tomahawk missile and Patriot air- defense systems, plans to capture a larger share of the $9 billion professional instruction market. Raytheon next week will open a global training division, which plans to use expertise culled from working with NASA and General Motors Corp. (NYSE: GM).
Meanwhile, in deal news, the $2.13 billion bid of WPP Group Plc, the world’s second- largest advertising company, for Taylor Nelson Sofres Plc has turned hostile as WPP took it to investors following its rejection. The hostile bid values Taylor Nelson at a 52% premium over its closing price on April 28, the day before London-based Taylor Nelson said it was in merger talks with German competitor GfK AG.
Helen of Troy (NASDAQ: HELE) sells personal care and household consumer products. The personal care goods include such items as hair dryers, curling irons, hair setters, women’s shavers and skin care products. The firm offers its own lines (e.g: Helen of Troy, Hot Tools and Hot Spa), as well as licensed merchandise (e.g: Vidal Sassoon, Revlon and Dr. Scholl’s). On the household side, offerings include kitchen tools, household cleaning items, gardening tools and rechargeable lighting devices. Products are sold through beauty supply distributors and such mass merchandisers as Wal-Mart Stores (NYSE: WMT) and Target (NYSE: TGT). Procter & Gamble (NYSE: PG) is a major competitor.
The company pleased investors last week, when it reported fiscal Q1 EPS of 42 cents and revenues of $145 million. Analysts had been looking for 30 cents and $142.8 million. The sales figure was a company first quarter record.
The Office of Federal Housing Enterprise Oversight (OFHEO) has issued a statement today on the stability and solvency of the GSE’s in response to the unprecedented run on their stock prices as increasing turmoil in the housing market drives loan losses skyward.
From the OFHEO:
For Immediate Release
July 10, 2008
STATEMENT OF OFHEO DIRECTOR
JAMES B. LOCKHART
“OFHEO has been monitoring and continues to monitor closely Fannie Mae, Freddie Mac and the mortgage and financial markets. As one would expect, we are carefully watching the Enterprises’ credit and capital positions.
As I have said before, they are adequately capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds the statutory minimums. They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.
At the time of our March 2008 capital agreement with the Enterprises I said: `OFHEO will remain vigilant in supervising the safe and sound operations of these companies, and will act quickly to address any deficiencies that may arise. Furthermore, we recognize the need to ensure that their capital levels are strong, protecting them from unforeseen risks as the market recovers.’
Including the $7.4 billion Fannie Mae raised in May in accordance with our March agreement, the Enterprises have raised over $20 billion in capital. They are using it to continue to grow and to play a critical role in the mortgage markets, which we expect them to continue to do. To support their mission, Freddie Mac is committed to raising an additional $5.5 billion, which they will do given appropriate market conditions. At a very difficult time in the market, the Enterprises have the flexibility and sound operations needed to support their mission.”
And as regular commenter Don asked - why would the government try to pass a bill to put more risk on these institutions? A great question indeed unless you simply realize that the $300 billion bail out bill is really just a red herring to the massive trillion-dollar bail out that is in the works to save Fannie and Freddie.
After having monitored blogs and news of the iPhone 3G launch all morning and afternoon, the general feeling I get is that the launch of the iPhone 3G could be considered nothing less than a disaster. Blame Apple Inc. (NASDAQ: AAPL), blame AT&T Inc. (NYSE: T) — but if you were brave enough to “have to have” an iPhone 3G on launch day, you may have a need for a stress ball by now.
It appears that Apple’s integration with AT&T’s activation system didn’t fare so well on this day. Both companies should have known, like June of last year, that it would be a super-busy day for the iPhone universe. In what seems like a commonplace event on large product launches, activation servers crashed, software updates failed (even for the older iPhone owners who wanted to updated to the newer software) and scores of customers were left without working iPhones as the in-store activation process was completely fubar’ed by both companies.
For Apple to have such an awesome piece of hardware and software in the iPhone 3G, working with an aging and piecemeal telecom carrier was unfortunately a necessity. After all, Apple does not own a national wireless network with high-speed data capability. But the customer process failed miserably today — something that zealous and exuberant iPhone 3G buyers should not forget. Did you really, really need that iPhone 3G today? If your answer is yes (yeah, right), you should have expected a nightmare. For many of you, that was delivered rather nicely. Hope you kept up with your pulse, eh?
This is how it goes - capital dries up, the company recognizes it can’t get out of the hole, cuts staff and operations, and it creates a panic. It’s a self-fulfilling prophecy once the bank realizes there’s no end in sight to the loan losses and instability. We’ve seen it time and time again in this mess. New Century, Fremont, Countrywide, IndyMac. They’re all victims to the same vicious cycle. (Although I should be slapped for calling any of these greedstitutions victims.)
From Bloomberg:
IndyMac Bancorp Inc., the California- based lender that is firing half its employees, is facing “elevated levels of deposit withdrawals” after U.S. Senator Charles Schumer said the bank may be on the brink of failure.
Schumer’s comments about IndyMac’s reliance on deposits purchased from third parties are causing depositors to pull their money and causing added restrictions on the lender’s borrowings, IndyMac said in a filing today.
IndyMac dropped 32 cents to 39 cents at 10 a.m. in New York Stock Exchange composite trading. The firm, which had a market value of $3.4 billion in mid-2006, lost more than 95 percent in the past year. Schumer, the New York Democrat, last month sent letters to the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Federal Housing Finance Board and the Federal Home Loan Bank of San Francisco, warning of a potential collapse of the lender.
“IndyMac was one of the banks that was using relatively weak underwriting standards on the basis that housing prices would continue to rise in value,” said Jason Arnold, an analyst at RBC Capital Markets in San Francisco, in an interview yesterday. “With prices coming down, that became the bottom card in the house of cards built by these lenders.”
The demise of IndyMac would be the biggest collapse of a U.S. mortgage lender since the bankruptcies of Fremont General Corp. and New Century Financial Corp. The company’s key asset is its Southern California retail bank network with 33 branches and $18 billion in deposits, mostly insured by the FDIC, Arnold said. IndyMac’s inability to find a buyer or attract capital, despite pressure from regulators, reflects continued concern over the declining value of its loans, he said.
Over the past couple years, major players like Google (NASDAQ: GOOG) and Amazon.com (NASDAQ: AMZN) have invested in the so-called “cloud.” Basically, they are leveraging their huge infrastructures to provision services - like web hosting, storage and so on - to other companies. Actually, I know many startups that have such deals (helping to cut costs and get to market faster).
But what if you don’t want to outsource this? Well, there is an alternative: Parascale. The company sells cloud software that you can install on your own servers.
As an indication of its power, Parascale has raised $11.37 million in a Series A round. The investors include Charles River Ventures and Menlo Ventures (both firms have extensive backgrounds in the storage area).
Parascale got its start four years ago. Interestingly enough, it hasn’t been an easy journey. The original team had to get second mortgages and lines of credit to support operations.
But now, it looks like the timing is right. “With the explosion of digital content,” said Sajai Krishnan, who is the CEO of Parascale CEO, “there is a need for more efficient storage systems.”
The Parascale Cloud Storage (PCS) is built on widely followed standards as well as Linux servers. This makes it easier for customers to adapt the technology to their needs (which is not an easy thing to do with Google and Amazon.com).
No doubt, the storage marketplace has gone through several major shifts over the past twenty years. So, with cloud storage, it looks like we may be seeing another shift - and Parascale will now have the resources to become a leader in the space.
The incredibly rapid fall of discount clothier Steve & Barry’s continues. Newsday is reporting that the company told the bankruptcy court that it has no available cash or financing, and that it needs proceedings to be streamlined so it can sell its assets by July 31st. Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail and investment banking firm, told Newsday that the move is very unusual, and that it speaks to the tightness of the credit markets and the terrible state of Steve and Barry’s finances.
The asset sale will be interesting — many of the stores will be closed and it’s possible that all of them will go. But Steve & Barry’s model of ultra low-priced young adult-oriented apparel has value, as do its licensing deals with Stephon Marbury, Ben Wallace, Venus Williams, Bubba Watson, Amanda Bynes, Sarah Jessica Parker, etc. Wal-Mart Stores, Inc. (NYSE: WMT), Sears Holding Corporation (NYSE: SHLD), and every other retailer looking for inroads into the college demographic should be taking a look at this one. Acquisitions rarely create value, but buying this one off the scrapheap would likely entail very little risk.
In order to understand the current market turmoil it is important to look at the history behind the two largest government sponsored entities (GSEs), the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae was founded as a government agency, part of FDR’s New Deal in 1938 during the Great Depression to provide a secondary market for mortgages and to also provide liquidity to the mortgage market. The longer term fully amortized loan products were an innovation at the time.
The birth of Fannie Mae came at a time that was riddled with bank failures. During the 1930s bank after bank failed on bad loans and foreclosures skyrocketed. As documented by painful stories of people losing their homes during the Great Depression, this was the climate that bred Fannie Mae. The essence of Fannie Mae was to provide a larger incentive for homeownership. Keep in mind that in 1940 the homeownership rate was 44 percent. Measure that up with the peak of 69 percent in 2004.
As it turned out, the idea of a longer term fixed mortgage took hold and Fannie Mae served its purpose of providing liquidity for the next 30 long years. In fact, Fannie Mae held monopoly status on the secondary mortgage market all the way up until 1968. In 1968 Fannie Mae was converted into a private corporation. This is where I think much confusion lies in whether these are government agencies or private enterprises. Well, for 30 long years Fannie Mae was a government agency.
Fannie Mae’s primary method of making money is by charging a guarantee fee on loans it securitizes into MBS bonds. Investors assume that Fannie Mae takes on the risk and they get to keep this fee. The underlying assumption, at least from investors in these bonds, is that the principal and interest on the mortgages will be paid regardless of whether the actual homeowner pays.
In 1970 to expand the secondary mortgage market and end Fannie Mae’s monopoly on the secondary mortgage market, Congress chartered Freddie Mac as a private corporation to provide competition. Freddie Mac’s primary revenue stream and business model is nearly identical to that of Fannie Mae. Both GSE’s are only allowed to purchase conforming loans which is a reason why the current legislation battle and lifting of caps has been such a big issue over the past few years. During the boom, that is where other institutions jumped in with non-conforming loans such as Pay Option ARMs and jumbo loans that did not find a market and created a speculative fever. In fact, during the past decade Fannie Mae and Freddie Mac started losing a significant share of the mortgage market.
If you are curious to see how this market dislocation occurred, here is a snapshot of how the jumbo market for the first half of 2007:
As you can see, the non-jumbo market was rather bland and vanilla looking while the non-jumbo market is where much of the problems occurred. The push right now and the overwhelming mantra is to provide further liquidity. The market is in need of credit Drano and even with the current housing bailout bill which looks like it will pass, the idea was that Fannie Mae and Freddie Mac would be ready to saddle up to increase liquidity in the secondary market. The only problem is, Fannie Mae and Freddie Mac both may be the one’s in need of liquidity:
What would cause such a market punishment for these two government sponsored entities? Well earlier in the week it was thrown out by former St. Louis Federal Reserve President William Poole that these two may actually be insolvent:
“(Reuters) Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole was quoted as saying in an interview held on Wednesday.
Chances are increasing that the government may need to bail out the two mortgage companies, Poole was quoted as saying.
Shares of the two companies have taken a beating recently on worries about whether they can withstand more losses and support housing as well as concerns that they may need to raise massive amounts of new capital.”
The problem with this sent many official including U.S. Treasury Secretary Hank Paulson to say that a government takeover of Fannie Mae and Freddie Mac would not be necessary. As the market kept pummeling shares of Fannie Mae and Freddie Mac, Ben Bernanke stepped in and did the following:
“(MarketWatch) Typically, the Fed has acted as a lender of last resort only for commercial banks. But the Fed has authority to lend to almost anyone, if the Fed Board of Governors agrees that conditions are dire enough.
Earlier this year, the Fed board voted to open up its discount window (where it makes cheap loans to banks) to the investment banks. The Fed even created a special entity to hold the especially toxic assets from the Bear Stearns fire sale.
Under Fed regulations, regional Fed banks can offer loans to any “individual, partnership, or corporation” under “unusual and exigent circumstances” but only “if, in the judgment of the Federal Reserve Bank, credit is not available from other sources and failure to obtain such credit would adversely affect the economy.”
There’s no indication that Fannie or Freddie have asked to borrow money from the Fed, or that the Fed board has voted to authorize any loans.
Bernanke’s statement isn’t an indication that Fannie or Freddie will be going to the discount window any time soon. It’s really more like a letter from the fire department saying that of course they’d come if there were a fire.
Arsonists, take note.”
This action sent stocks from being down over 240 points to actually bringing them in the positive! Yet as the day went on, the market ended lower by 128 points and Fannie Mae and Freddie Mac still got hammered, just not as bad. This kind of volatility is similar to what occurred in October of 1929 with big figures launching out last minute efforts:
“At about half-past one o’clock Richard Whitney, vice-president of the Exchange who usually acted as floor broker for the Morgan interests, went into the “steel crowd” and put in a bid of 205 — the price of the last previous sale — for 10,000 shares of Steel. He bought only 200 shares and left the remainder of the order with the specialist. Mr. Whitney then went to various other points on the floor, and offered the price of the last previous sale for 10,000 shares of each of fifteen or twenty other stocks, reporting what was sold to him at that price and leaving the remainder of the order with the specialist. In short the space of a few minutes Mr. Whitney offered to purchase something in the neighborhood of twenty or thirty million dollars’ worth of stock. Purchases of this magnitude are not undertaken by Tom, Dick, and Harry; it was clear Mr. Whitney represented the bankers’ pool.
The desperate remedy worked.The semblance of confidence returned. Prices held steady for a while; and though many of them slid off once more in the final hour, the net results for the day might well have been worse. Steel actually closed two points higher than on Wednesday, and the net losses of most of the other leading securities amounted to less than ten points apiece for the whole day’s trading.”
We don’t have mighty men like a Whitney or Morgan on Wall Street today. Buffet carries the same power but he isn’t planning on stepping in given that his Berkshire Hathaway is down a stunning 17% for the year (for forty years, his worst yearly return was -6.2% in 2001). This action stunted the market for a bit but the implicit guarantee of the GSEs will now be put to the test.
The sheer size of the GSEs is daunting. Combined, Fannie Mae and Freddie Mac have over $5.1 trillion in debt through MBS and debt:
This is larger than the size of the United States publicly held debt. If the government were to take on the GSEs this would not only jeopardize our financial security, it may damage our country’s credit rating (what is left of it)!
Given that the secondary market has frozen over the past year, there has been a push to increase the size and scope of the GSEs but the problem is that they are already way too big. Increasing them will only further create the problem that got us here. They are no longer solvent. Their combined market cap is $15 billion and they are linked to $5.1 trillion in debt. The Case-Shiller index already shows that the United States is down over 15% on a year over year basis. Given that the market real estate peak was somewhere at $23 trillion, $3.45 trillion in equity has evaporated! Estimates tell us that housing nationwide will fall an additional 10 to 15 percent meaning $2 to $3 trillion more in equity is going to vanish.
That is why this story is so perilous. If you think Bear Stearns was a big deal you have seen nothing should Fannie Mae and Freddie Mac continue on this path. Unless housing miraculously goes positive, I simply do not see how the government doesn’t nationalize these two. The fact that the Fed has already opened the door to the credit swap meet tells us there are major problems here. There is a fantastic article in Vanity Fair talking about the entire Bear Stearns boondoggle:
“(Vanity Fair) The first team of Morgan executives reached Bear’s sixth-floor executive suite around 11 that night. It didn’t take long for them to realize the danger in what they were being asked to do. If Dimon lent Bear $15 billion or so and the firm imploded the next day, they could lose it all. A little after midnight Dimon told Schwartz in a phone call, “We’ve got to get the Fed in on this.”
Downtown, Tim Geithner was waiting when Dimon telephoned. Any bailout, Dimon reiterated, was too big, too risky, for Morgan to handle alone. Both men knew that meant only one thing: somehow Bear had to be given access to the Fed “window,” that is, the spigot of cash that was available to the nation’s commercial banks, but not its investment banks. The only way for the Fed to help, to give Bear access to the “window,” was to lend Morgan the money, allowing the bank to act as a bridge across which the Fed cash could stream into Bear’s vaults.
Geithner, quickly grasping the wisdom of the move, got on the phone with Washington, going through the details with the Fed’s chairman, Ben Bernanke, and the Treasury secretary, Hank Paulson, and his counterparts at the S.E.C. If they could just get Bear through the next day, perhaps a bigger and better deal could be forged over the weekend. By two a.m. teams from the Fed and the S.E.C. had joined the Morgan bankers at Bear, poring over the numbers. In Molinaro’s conference room, Schwartz and Molinaro paced, occasionally taking bites of cold pizza; their fate, they now realized, was largely out of their hands.”
Now how much did that Bear Stearns bailout help our economy? It didn’t. If anything it allowed Wall Street firms to off load toxic waste onto the public while a few Wall Street firms lived to see another day. Now, they want to shovel more toxic waste onto the government via Fannie Mae and Freddie Mac through the new housing bailout but the only problem is, Fannie and Freddie already have a ton of toxicity in their folders! The end game is quickly approaching and the volatility of today should make you keep your powder try. Bernanke allowing Fannie and Freddie to come to the window is like calling out, “5,000,000 shares of GM at $20.” Alas there are no giants in our current economy.
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After having monitored blogs and news of the iPhone 3G launch all morning and afternoon, the general feeling I get is that the launch of the iPhone 3G could be considered nothing less than a disaster. Blame 
Over the past couple years, major players like 
and 
. He also operates 
The incredibly rapid fall of discount clothier Steve & Barry’s continues.
