Friday, September 5, 2008

WSJ: Treasury Close to Fannie/Freddie Bailout

This is hitting the wires everywhere.

Get ready folks, here come the fireworks. Word is the bailout could be announced as soon as tomorrow. Here is the news from Bloomberg:

"Sept. 5 (Bloomberg) -- Treasuries fell amid speculation the U.S. is close to reaching a plan to help troubled mortgage finance companies Fannie Mae and Freddie Mac, easing the haven appeal of government debt.

Yields climbed after the Wall Street Journal reported that the Treasury Department could announce a plan as early as tomorrow. Bonds rallied earlier as a government report showed the economy lost jobs for an eighth consecutive month in August, increasing speculation the Federal Reserve will cut rather than raise interest rates.

``We are seeing some selling of Treasuries off of this because it creates a safer environment,'' said Glen Capelo, a Treasury trader at RBS Greenwich Capital in Greenwich, Connecticut, one of 19 primary dealers required to bid at government debt sales.

The yield on the benchmark 10-year note rose 7 basis points to 3.69 percent at 4:42 p.m. in New York, according to bond broker BGCantor Market Data. It reached 3.55 percent earlier today, the lowest since April 15. The 4 percent security due August 2018 fell 17/32, or $5.31 per $1,000 face amount, to 102 18/32.

Ten-year note yields touched the lowest in almost five months before paring gains as stocks rebounded from the worst week since May. Futures show that traders see a 9 percent chance central bankers will reduce borrowing costs by year-end, compared with 43 percent odds for an increase a month ago.

Payrolls fell by 84,000, and revisions added another 58,000 to job losses for the prior two months, the Labor Department said today in Washington. The median forecast in a Bloomberg News survey of 76 economists was for a loss of 75,000. The jobless rate jumped to 6.1 percent, matching a high reached in September 2003, from 5.7 percent the prior month."

Quick Take:

Well it looks like the bailout is going down this weekend. Monday will be interesting. You could potentially see a wicked rally on the announcement. It all comes down to the language and what they plan on doing.

There are many questions that I have here regarding this announcement. Do the common shareholders get wiped out? What about the preferred? How does the bond market react to this. How high do the yields on the 10-year go if a bailout is announced?

It looks like yields rose just on the rumor that this was going down this weekend. This explains the big rally this afternoon on Wall St. There is not much else to say here until we see the details.

Bottom Line:

Whatever the Treasury decides to do, it does not change the fundamental problems in the housing market and the economy. Any bounce we get on this news becomes the shorting opportunity of a lifetime IMO.

This is the last big stick save! The Treasury better get it right. "Moral Hazard" is in play here folks. Next week will be historic.


Fannie/Freddie now plummeting after hours according to CNBC after initially bouncing. It looks like the common shareholders might get wiped out.

Hold on tight folks. Its gonna be a wild ride!


Anonymous said...

Hey Jeff,

Read your blog everyday. I'm a noob concerning all this economics/market stuff but I'm learning fast. I'm guessing that after the bailout loan rates will take a step up. Was just reading an article on Bloomberg about a website that is like EBAY for loans: I wonder if this idea will take off when more banks start to go under and lending rates increase. Kinda interesting - what do you think?

Jeff said...


Interesting site thanks for sharing. Yeah rates are gonna rise. I am hearing all kind of rumors tonight.

To your point. I was talkign to an Ex Bear Stearns guy last week. He told me in the early '80's when rates were in the teens that homeowners that owned their house outright would offer mortgages ato prospective buyers at a couple points below the bank.

So say Citi is at 16%. Homeowner tells the buyer he will do the same deal at a 14% interest rate. Seller makes a killing and gets a nice check every month until the buyer refi's when rates drop.

Its a beautiful deal if you own a home outright.

I am sure there are going to be many creative mortgages that are designed when this all plays out anon. its going to be very interesting!

Jeff said...

What I am hearing out there:

I will get into this more tomorrow. Put this in the rumor category.

Fed is going to basically shut down Fannie/Freddie and throw all loans through FHA.

Fannie and Freddie will be "run off" to nothing and the Treasury will use its balance sheet to absorb the losses.

The Fannie and Freddie " bloated hedge funds" are killed off and FHA is the new Government lender.

This would mean Fannie and Freddie common stock are zero's.

FHA lending will be OLD SCHOOL. 20% down and 36 DTI or something like that. This means financials and housing prices plummet as old lending standards are implemented.

This is a rumor. I factually know as much as you all do. Nothing.

Anonymous said...

If any of the equity holders in Fannie/Freddie get anything I will blow my top. What a huge slap in the face that would be for all Americans who are taking on this massive debt. I see the necessity of bailing out the preferred/bond holders, many of these are countries. I guess we have to look out for the residents of these countries who had no control over where their leaders were putting their money. But the same could be said for all the mutual fund investors who don't have much control over where the mutual fund manager puts their money.

Jeff said...


I am right there with you. My top has already blown from the fact that these bloated pigs are getting bailed out!

I hate to say it but the preferred shareholders are going to be saved from what I have heard.

The Treasury can't afford to not bail them out because PIMCO and the regional banks all own this stuff.

If the preferred goes to zero many banks might not be able to take the hit due to their fragile state.

Lets see what the Treasury does , but my guess is their butts get saved. this whole thing makes me sick to my stomach.

Bailout after bailout. No lessons will be learned which means Wall St. will do the same thing all over again down the road.

I will have a post up later today.

growler said...

What are your thoughts for Monday. I guess since it's been "opposite day" for some time now with regard to market activity, we will see one hell of a bounce.

How long do you think the bounce will last? Or does it depend on what the bond market does (i.e. take rate higher)?

Jeff said...


Thats the million dollar question. I am reading a lot this afternoon and trying to digest all of this.

Its very complicated. Its going to come down to what the Treasury announces. From what I am reading, its going to be announced on Sunday before the Asias markets open.

Check back. I will have something up in the late afternoon.