Monday, November 10, 2008

Fannie Fiasco

Good Evening Folks

Welcome to reversal Monday. Well, the market cheered the China bailout as we shot out of the gates up 200 on the DOW this morning. The markets quickly reversed and ended up closing in the red by the end of the day.

One of the main concerns according to CNBC was what I discussed on here yesterday. If China is going to use $580 billion of their reserves on a huge financial stimulus, how are they going to buy treasuries? There was a lot of banter and debate among the pigmen on how this all plays out.

We will learn a lot about China's post stimulus demand for treasuries this week. There are 3 massive treasury auctions this week. Keep a close eye on these folks. These auctions could be market movers if they don't go well. Watch the bond market.

Fannie Fiasco

This was another huge market mover today folks. The housing market continues to disintegrate. Fannie's earnings were a complete disaster. In fact, they were flat out gruesome! Here is article one on Earnings:

"Nov. 10 (Bloomberg) -- Fannie Mae posted a record quarterly loss as new Chief Executive Officer Herbert Allison slashed the value of the mortgage-finance provider's assets by at least $21.4 billion and said it may need to tap federal funds next year.

In its first report since being seized by the U.S. government in September, Washington-based Fannie said its third- quarter net loss widened to $29 billion, or $13 a share, the largest for any U.S. company this year.

Allison, the former head of TIAA-CREF who was hired when the government took over Fannie and Freddie Mac, reduced most of Fannie's deferred tax credits, increased default estimates and raised credit loss estimates. The decisions cut Fannie's net worth by 79 percent and shows the new management is taking a dimmer view of the company's financial future than the team under former CEO Daniel Mudd.

``The earnings were gruesome,'' said Howard Shapiro, an analyst at Fox-Pitt Kelton Inc. in New York. ``They're trying to clean house.''

Article Two On the the Treasury's Fannie Dilemma:

"Nov. 10 (Bloomberg) -- Fannie Mae may need more than the $100 billion in funding pledged by the U.S. Treasury to stay afloat after reporting a record $29 billion loss and confronting more difficulty in issuing and refinancing debt.

``This commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,'' if there are further ``substantial'' losses or if the company is unable to sell unsecured debt, Washington-based Fannie said in a filing today with the U.S. Securities and Exchange Commission.

Fannie said it has a limited ability to issue debt maturing past one year, citing market conditions, the lack of an explicit federal guarantee and competition from government-insured bank bonds. Fannie, which along with Freddie Mac was seized by regulators on Sept. 6, slashed the value of its assets by at least $21.4 billion for the third quarter and increased credit loss reserves by 75 percent to $15.6 billion. Freddie is required to file its quarterly earnings by the end of the week.

``Treasury may end up putting far more than $100 billion into these entities, especially if the housing market continues to decline,'' said Rajiv Setia, a fixed-income analyst at Barclays Capital in New York. ``There's just no way, no way'' Fannie and Freddie will emerge from conservatorship within the next two to three years, he said."

My Take:

What a fiasco. A $29 billion dollar loss in one quarter! It takes GM almost a full year to lose that much money! The Fed has a better chance of seeing god than getting out of this mess for $100 billion. I hope some of you picked up some SRS. It was up $24 today as it becomes more and more evident that the commercial and housing markets are completely blowing up.

God only knows how much this is going to cost us when its all said and done. As I have been saying for the past couple of weeks, the TARP is nowhere near big enough to get us out of this financial crisis. Fannie alone is going to burn through over $120 billion this year as the housing time bomb blows up.

The TARP is like using a BB gun to shoot an elephant in this situation. It can't bailout America. This problem is way bigger than the government, and the reality of this is becoming more and more apparent everyday.


AIG also was in the news today and gives us more evidence of how in over our heads in terms having the $$$ to stop this financial tsunami. This bailout originally started at $85 billion. As you can see, this problem has grown out of control just like the Fannie fiasco. Take a look at the news from the WSJ on the new AIG bailout:

"U.S. Throws New Lifeline to AIG,
Scrapping Original Rescue Deal


The U.S. government reached a deal Sunday night to scrap its original $123 billion bailout of American International Group Inc. and replace it with a new $150 billion package, according to people familiar with the matter."

Ooops...I guess AIG's problems are way worse than anticipated. This bailout is now costing us almost double what we expected. How many "lifelines" is this country willing to extend? Last I saw on "Who wants to be a Millionaire?" you only get one lifeline. Maybe the government needs to watch Regis and follow suit.

A little math lesson here folks: These two companies alone are going to cost the taxpayers $270 billion. How in the hell is the TARP going to save us all when Fannie and AIG alone are going to cost us an equivalent of more than 1/3 TARP's $700 billion total price tag? I hope they are kidding.

Bottom Line:

The bailouts need to stop or we are going to end up living in Hoovervilles again. You know what happens next here folks. Paulson will once again come into DC with hat in hand asking for another housing bailout package from Congress. The TARP will be emptier than Lehman Bros. savings account within a matter of weeks.

Folks, Paulson must be stopped if he comes asking for more. I mean where will this all end? Do you realize how long its going to take to pay back these debts? Its going to take generations if this crap doesn't stop.

Companies need to be allowed to fail. We cannot afford to keep doing this! We will default on ourselves if the government tries to save us all.

The massive debts incurred by Wall St and the people of this nation need to be defaulted on versus being sucked on to the Treasury's balance sheet at the expense of the taxpayers. We need to march into Washington with torches and pitchforks if they attempt to suck another $700 billion out of us!


From a trading perspective. I held onto my SRS and my other shorts despite the jump today. I plan on dumping SRS tomorrow if we see another leg down. DIG is starting to look compelling if oil gets into the 50's. So far the 60 level appears to be holding so I will wait. I also held onto my GDX calls. No new positions here. Waiting for better entries.

Lets hope the bailouts stop soon folks.

China may not be there to finance our debts any longer. We are running out of $$$ and time.

Be prepared for The Great Depression Part 2 if this insanity continues.


jeff said...

A little anecdotal story for everyone. I talked to a guy who runs a car dealer today in PA.

Large dealership that on average sold 60 cars/month during normal times. Last month they sold 2!

Scary times folks...Scary times.

AMEX just became a bank holding company tonight. They must be in deep trouble.

Things are falling apart again folks at a rapid pace. GM was given a price target of $0 today as the analysts assum the government will bail them out and wipeout the shareholders in the process.

I don't know what can be done to stop the tankage here folks. Be carreful with your investments.

Avl Guy said...

It seems like our first flock of ‘Black Swans' have begat more 'Black Swans'...things that people said 'would not happen'....are happening more frequently and in different areas.
It's hard to believe there was a point when educated pros said' it's all limited to subprime rez mortgages and contained', and 'the recession will be short & shallow'.
But then, they also said, 'housing markets never decline nationally' and 'stocks are bottoming now'.

Jeff said...


We certianly are in unprecedented times!

I am amazed at all of the destruction that I am witnessing. Lets see what happens tomorrow.