Sunday, July 13, 2008

The Government Saves Its Fannie

The lies are over, for the time being.

As NYT correctly noted, today:

...for many years, a steady of stream of leaders from the Federal Reserve and to officials from Republican and Democratic administrations has denied the existence of a so-called “implicit guarantee.” Those who denied the existence of the guarantee included Treasury secretaries Robert Rubin, Lawrence Summers and Henry M. Paulson Jr., and Federal Reserve Chairmen Alan Greenspan and Ben S. Bernanke....Now, in the face of market turmoil in recent days, a quiet yet dramatic policy shift has occurred. Government officials no longer deny the existence of a guarantee. Instead, senior officials at both the Fed and the Treasury have been talking in recent days of possibly taking steps to “harden the guarantee.”

That's today. As recently as yesterday, peculiar lies continued.

On Friday, Reuters reported that:

Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to a source familiar with the conversation.The source said that Bernanke and Syron spoke by phone Thursday afternoon and the central bank chief said in that call he intended the discount window to be opened if necessary to the two largest U.S. mortgage finance companies.

The Federal Reserve denied this Saturday. WSJ reported:

“Federal Reserve officials are following the situation closely, but there have been no discussions with the GSEs about access to the discount window,” Fed spokeswoman Michelle Smith said when asked about a report that Fed Chairman Ben Bernanke had told Freddie Mac’s chief executive that the GSEs were eligible to use the facility.

We commented:

Was the Reuters reporter making the initial report up? Extremely unlikely. Something unusual is going on here. Market calming news is killed..

Today, Sunday, the truth comes out. The Fed has issued a statement that it will supply Fannie Mae and Freddie Mac any money it needs. The Reuters report appears to be 100% correct. The Fed denial a lie.

So what is going on?

The markets are forcing action on the part of the government, at breakneck speed. Both Fannie Mae and Freddie Mac are, for all practical purposes, bankrupt. The mortgage crisis could well mean the true value of their mortgage portfolios are underwater by as much as a TRILLION dollars.

Market participants wouldn't fund Fannie and Freddie anymore, especially with Paulson and others indicating that they wouldn't let shareholders of Fannie and Freddie benefit from a rescue.

In the background with all this going on, you have Paulson's private equity cronies chomping at the bit to buy bank stocks.

They want bank stocks down in price, but they don't want a total crash of the system. Pushing Fannie and Freddie over the brink would crash the system.

Thus, we have these odd occurrences. A Federal Reserve rescue that is leaked, but then what appears to be an incorrect denial of the facts of the leak. You see, they really don't want to give out any positives here, but they don't want to crash the system. By Sunday, they realized they were close to crashing the system. Thus, they realized they had to come clean with the fact that they will have to backup Freddie and Fannie. Thus, the latest Fed statement, and the statement from the Treasury that it will throw money at the problem.

However, the Treasury statement is sufficiently vague as to continue to scare the hell out of Fannie and Freddie shareholders. Debt holders look safe. Equity holders are dead in the water, that is, until private equity scoops up the shares, down the road, for pennies. There will be billions made on this crisis, maybe trillions. They just haven't figured out all the details yet.

Part of the Treasury rescue plan will require approval from Congress, in this crisis atmosphere it should be approved quickly. It will be interesting to see if the proposal of Randy Quarles (Private equity's point man on this) to remove barriers to the amount of capital that private equity can put into bank stocks, in some form, finds its way into the Congressional rescue package.

If it does, you will know that the raping of the average investor is near orgasmic state.

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