Fannie and Freddie Rock the Markets/IndyMac on Life Support

Ok folks!!

Its going to get very interesting over the next several days. I see a Wall St. panic right around the corner. Traders acted like they saw a ghost today as the market bounced all over the place.

What looked like a solid start this morning turned into a mini panic as the Freddie and Fannie news hit the wires.

"July 7 (Bloomberg) -- Freddie Mac and Fannie Mae fell to the lowest in 13 years in New York Stock Exchange composite trading as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.

Freddie Mac fell 18 percent and Fannie Mae dropped 16 percent after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.

``There's a lot of apprehension about writedowns,'' Tierney said. ``If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.''

Quick Take:

Lets put this in perspective. The total capitalization of Fannie and Freddie is about $80 billion. When the street heard the news that these two may need to raise capital equal to what they are worth, everyone ran to the exits and sold all the financials. The DOW violently reversed course.

Could Fannie and Freddie fail?

So what would the ramifications be to the housing market if these two went under? Lets put it this way, they are doing 80% of all residential loans right now. In other words, if Fannie and Freddie go bye bye, there will be no lending or housing market.

The banks are broke and don't want to lend any money unless its government backed. Now obviously, the government is not going to let this happen. The questions now becomes what do they do about it? This is becoming an enourmous mess folks!

My guess is we are looking at a nationalization of housing. Here is the scary part. There is no way the government is going to take on housing at ridiculously overinflated prices. Sweden let prices drop 50% from the highs before they nationalized it.

Why would the government take on all of that debt? My guess is the government will keep Fannie and Freddie alive and allow them to cut some corners and allow for prices continue to plummet. How fast are home prices falling? Check this out.

This quote from the article says it all:

``Prices are going down so fast they can't go down much longer,'' said Christopher Thornberg, president of Beacon Economics LLC in Los Angeles, who predicts a total decline of 30 percent nationally in the housing recession. ``We've never seen prices fall like this.''

Once the free fall levels off, the government will then pull the trigger and do some type of nationalization where they guarantee the loan values. This will not happen until housing is affordable!

It makes no sense for the government to nationalize housing at unaffordable levels and take over debt that will never get paid off. We are heading back to 3x income everybody. Mark my words! This may mean price drops of 50-60% in the bubble areas.

I can smell the fear in the air among home sellers as Wall St. spirals downward. Panic is on the verge of occurring all over the country as sellers flock to the exits getting whatever they can for their house. It happens the same way everytime when a housing boom ends.

The VIX Rises

The VIX(measures fear in the market) finally started to rise but it still has a way to go.

July 7 (Bloomberg) -- The benchmark index for U.S. stock options jumped to a three-month high as Freddie Mac and Fannie Mae plunged on the New York Stock Exchange, leading financial shares to the lowest since 2002.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, added 8 percent to 26.77 at 1:43 p.m. in New York. The index, which measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, advanced 64 percent since its 2008 low on May 15. The S&P 500 dropped 1.5 percent today.

``It remains a `shoot first, ask questions later' market when it comes to the financials,'' said Steve Sosnick, equity risk manager at Timber Hill LLC, the market-making unit of Interactive Brokers Group Inc. in Greenwich, Connecticut. ``If Fannie and Freddie are in trouble, and the stocks are telling you people think they are, then financial stocks have to be affected. Everyone's worried about financing.''

Quick Take:

I hate to say it guys, but until the VIX gets back into the upper 30's, I don't think this wave of selling is over. We are only in the mid twenties right now. The VIX hit 37 when Bear Stearns blew up. Until we see some type of capitulation in selling, stocks are going to continue to slowly bleed.

Today was the first day where the VIX finally started to spike. If we get back into the upper 30's and drop to around 1220 on the S&P, we may hit a short term bottom. I think there will be another leg down following this wave when the banks, home builders, and other financials start failing.

This will then be your bottom folks. I have no timeline on when this will happen but we still have a ways to go.

The one thing I can say on my timeline of the bursting debt bubble is its happening at a much faster pace then I ever could have imagined. The bottom may be here sooner than we think if we continue to blowup at this pace.


IndyMac Hangs by a Thread

IndyMac all but went under today as they scramble to survive. Here is the news:

"July 7 (Bloomberg) -- IndyMac Bancorp Inc., the lender that's lost almost 90 percent of its market value this year, will fire half its employees after regulators said the company is no longer ``well capitalized'' and the quarterly loss widened.

IndyMac will slash its workforce by 53 percent to 3,400 employees and curtail lending, the Pasadena, California-based lender said on its Web site. The company said it is working with regulators on a new business plan.

``We don't expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets,'' Chief Executive Officer Michael Perry said in the statement.

IndyMac, which was the second-biggest independent U.S. mortgage lender last year behind Countrywide Financial Corp., has lost almost $900 million in the nine months ended in March amid tumbling home prices. The company is focusing on mortgages that can be sold to government-sponsored enterprises like Fannie Mae and Freddie Mac."

Quick Take:

In a nutshell, this bank is toast. When it happens it will be one of the largest bank failures in history. this was the second biggest mortgage lender in the country! They were unable to find capital. I doubt the FDIC will allow them to survive very long without being able to hit their capital requirements. The stock currently sits at .50.

Bottom Line:

Stay tuned. We are witnessing the largest financial crisis in 70 years. You will be telling your grandchildren about this one years from now.

Lets just hope we can find an orderly way out of this.