Friday, July 11, 2008

Fed "Sticksave" Rumor Saves the Markets

Just a quick note on today.

Well we avoided Black Friday after Reuters reported that the Fed might allow Fannie and Freddie to access the discount window. Stocks bounced on the rumor, and then faded at the end of the day. The Dow ended up down 128 points. Here is the Reuters article:

"WASHINGTON (Reuters) - Fannie Mae and Freddie Mac said on Friday that their finances were sufficiently sound to withstand the housing crisis as government officials scrambled to restore confidence in the country's two largest mortgage finance companies.

U.S. Treasury Secretary Henry Paulson indicated that a bailout of Fannie and Freddie was unlikely despite financial market concerns that the agencies, which finance nearly half of U.S. homes, may have trouble raising enough money to keep buying mortgages.

A key senator said the U.S. Federal Reserve was considering allowing Fannie and Freddie to borrow directly from the central bank, spurring speculation that the Fed may take action as early as this weekend. Fannie and Freddie shares, after taking a beating, recovered some of their earlier losses but ending lower on the day.

Sen. Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, said he spoke with Fed Chairman Ben Bernanke and Paulson. Dodd said they were looking at various options, including opening access to the discount window, through which the Fed acts as a lender of last resort for the U.S. banking system.

Investors were worried that the mortgage agencies might run short of capital, placing the fragile U.S. economy at even greater risk and deepening the housing slump. Dodd sought to reassure investors about the health of the two companies."

Quick Take:

Well, we avoided a financial crash for the time being. This is a critical time for the Fed. Bernanke's legacy may be decided on how he reacts to the Fannie Freddie disaster. If these two GSE's fail then we face a systemic risk to the financial system.

Moral Hazard is seriously in play here. Ben won't be sleeping much this weekend.

Lets see what he and Paulson can come up with.

What a week! Stay tuned!

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