Fannie and Freddie Update! Judgement Day Tomorrow

Hello everybody!

I hope everyone had a nice weekend. I got away for some R&R this weekend and it was great.

OK guys and gals, tomorrow is a big day!

Fannie and Freddie's fate may be decided tomorrow. Let me explain. Take a look at this from Bloomberg:

"July 13 (Bloomberg) -- Fannie Mae and Freddie Mac are in talks with Treasury, Federal Reserve and White House officials to come up with funding plans should the beleaguered mortgage companies require financing, according to people with knowledge of the discussions.

Freddie Mac is scheduled to sell $3 billion in short-term notes tomorrow. Officials are negotiating plans for a possible funding backstop mechanism in case the McLean, Virginia-based company can't find enough investors for the debt, said the people, who declined to be identified because the negotiations haven't been announced."

Quick take:

So this is the deal folks. There is a $3 billion dollar sale of short term Freddie Mac notes tomorrow morning by the investment banks. Many in the Fed and on Wall St. are worried that there will be very little demand for this paper after what happened last week.

I talked to a Wall St. buddy over the weekend. Supposedly, if the $3 billion doesn't sell, the Treasury will know it in the morning and will step in and make an announcement on legislation to back Fannie and Freddie.

Now what this legislation looks like is anyones guess. This could destroy the markets tomorrow or it could cause a huge bounce. It all depends on what Paulson has to say.

New Developments Tonight!

Paulson came out with an announcement tonight after emergency meetings with the big wigs over the weekend. It looks like they are already setting the groundwork. Here is the link to tonights news:

"Paulson Seeks Authority to Shore Up Fannie, Freddie (Update1)
By Brendan Murray and Dawn Kopecki

July 13 (Bloomberg) -- Treasury Secretary Henry Paulson sought authority from Congress to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, aiming to stem the collapse of confidence in the largest sources of U.S. mortgage financing.

Paulson proposed that Congress enact legislation giving the Treasury temporary authority to buy equity ``if needed'' in the firms, and to increase their lines of credit with the department from $2.25 billion each. The Federal Reserve authorized the companies to borrow directly from the New York Fed, in a step that could provide funding before the bill is passed.

Today's announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the firms that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown."

Final Take:

It sure doesn't sound like they are too confident about that Freddie sale tomorrow! Paulson isalready laying down the groundwork for some type of bailout and the sale hasn't even been attempted!

Tomorrow is a big day for Fannie, Freddie, and the markets. Its all going to come down to the details of what the Fed plans to do. They could wipe out the equity holders if they try to nationalize it. They could allow them to use the discount window. Keep in mind, Congress has to approve the legislation. The Fed cannot act on its own.

There is also word out tonight that when they make the announcement on Freddie and Fannie, they may also tell the markets this is it in terms of bailouts. No link here but here is some of the story:

"NEW YORK (AP) - The U.S. government is signaling it won't throw a lifeline to struggling financial companies - except for mortgage linchpins Fannie Mae (FNM) and Freddie Mac (FRE) - marking a shift to a new and potentially more volatile phase of the credit crisis.

Such an approach could mean beaten-down investment banks like Lehman Brothers Holdings Inc. (LEH) and regional banks must now fend for themselves as they try to recover from billions of dollars in mortgage-related losses. That is bound to unnerve Wall Street, already anxious as it awaits financial companies' earnings reports that are expected to be down a stunning 69 percent from a year ago when all the numbers are in."

The markets are going too move big tomorrow folks. I can't tell you which way but I do know one thing. If the Fed tells the banks they are on their own you could see a big red day tomorrow.

Its going to be a wild ride. Fasten your seatbelts!