Sunday, October 12, 2008

The Real Housing Bailout

Just a quick note today.

The taxpayers were all robbed once again over the weekend as the Feds ordered Fannie and Freddie to start buying $40 billion a month of bad loans:

"Oct. 11 (Bloomberg) -- Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program."

My Take:

Here it is folks, the backdoor bailout! What a waste of money this is. This one could could cost us almost $500 billion annually as the government continues to try and sweep this nightmare underneath a rug.

My question here is what price is Fannie going to pay for these worthless assets? You can guarantee that Fannie will overpay for these subprime sandwiches on purpose in an attempt to re-capitalize the banks.

Fannie and Freddie going forward will be nothing but garbage dumps for toxic assets.

All of this spending by the government will result in dire consequences down the road. The risk of the USA defaulting on its own debt just rose considerably.

I guess if we go down, we plan on doing it in flames!


ZMonet said...

Does anyone have any idea what they are paying for these mortgages they are purchasing? Are they actually just paying face value? There is so much financial turmoil that it is easy for the government to slip these types of actions under the rug.

I see that futures look to be headed up tomorrow. I'm thinking this might be an opportunity to get back in on a short position, this time a little more sizeable.

Jeff said...


Good question on what they are paying. I don't even think I want to know! I am sure its way too much.

I would be a little careful shorting here. There were a lot of sticksaves over the weekend.

Europe announced the mother of all bailouts. Check it out:

We could moonshot higher this week. Some traders are calling for a multi week "bailout bull"rally followed by the mother of all selloffs at the end of the year.

I am not quite sold on this though. The market seems very nervous.

I am going to sit on my hands and see how potent this rally is. I might throw a few small positions with tight stops if the "apparent" morning rally doesn't look strong.

Its going to be interesting to watch. Trading right here is more psychological than technical so its extremely unpredictable.

Lets see if the bulls have faith that the sticksaves "saved" the system over the weekend!

ZMonet said...

Thanks Jeff. I didn't mean to imply that I would short tomorrow. I actually think the market will go up from here, but if we get to 9000 I might get a short position then...and then more if we make it to 10000. I'm not trying to trade the market as much as hedge. Should be an interesting day tomorrow, but aren't they all these days?

Jeff said...


That sounds like a good strategy to me!

You might just want to keep the hedges on your long term portfolio when you decide to jump back in so you protect yourself both ways.

I know its tempting to sell when they are up! However, I like to be hedged both ways on my retirement. You just never know what this crazy market is going to throw at you.

If you like trading the shorter term volatility, set aside a very small piece of your cash and jump into this trading cesspool!

This is how I set myself up. This way, I don't risk blowing myself up if the market heads north and I bet

The market always humbles everyone at some point. Thats why diversity is critical!

ZMonet said...

I got in right at the bell with a small position in QID. I was hesitant because the upside was so huge, but I sold out of QID last time at 75 so I figured getting in at 62.77 was pretty good. To tell you the truth, the more I see this market, the more I just think it is gambling. I justify my play two ways: (1) I think there was a ton of short covering today; (2) the deleveraging continues; and (3) if nothing else, I see this as a pure hedge.

Jeff said...


Working on a post now. Today's move was insane.

It seemed a little overdone, but tomorrow is where we need to focus because the bond market was closed today.

I will have somethign up in a 30 minutes or so.

Anonymous said...

When did you write your last post? When is in 30 minutes? :-)

Jeff said...


Its up!