Pittsburgh, PA (PRWEB) March 24, 2008
Make no mistake here. Bear Stearns collapsed. KaPOOOIE! Gone. An institution that claimed to have a book value of $80 dollars a share in just a week was forced by the Federal Government to dump itself into JP Morgan for $2 dollars a share. Hmmmm.
Within days, Fannie and Freddie announced that their capital reserve requirements were lowered by 30%, and they would immediately begin to take on more and more of the remaining mortgage market.
This is nationalization, folks. Get ready for it. As a matter of fact, Wreckonomics predicted this back on March 1st in an article titled "Pulling The Plug On Fannie Mae and Freddie Mac":
"This is a big set up for a taxpayer funded bailout, and yet another brilliant example of Wreckonomics... The goal here is for these companies to take the bad mortgages off the books of the big banks (that are all teetering on the edge of failure as we speak). Once this happens, it will be much easier for the sheeple to accept a taxpayer funded government bailout."
Nationalization is a very innocuous term for "the taxpayer". In other words, the citizens of the United States will be paying for the unbridled risk taking of mortgage lenders, wall street financiers and even the Federal Government, AKA Fannie Mae and Freddie Mac. Everyone else will be paying for the lies and manipulation. The general public will be bailing out the very criminals who, at the end of this crisis... if it ever ends, will end up even richer than when they started. The big boy network is circling the wagons, again, and the people are getting stuck with the bill.
As Doug Noland from Prudent Bear says:
"I have fully expected the GSEs, at some point, to be taken over by the federal government. It may have been orchestrated subtly, but I can only presume that such a historic endeavor was accepted this week as the only means of averting financial dislocation. And for their regulator to suggest that the GSEs today have any handle whatsoever over their unfolding "risk management" challenge is wishful thinking - at best...
As far as I'm concerned, much of the U.S. mortgage market was this week essentially Nationalized. I'll take the dramatic narrowing in agency debt and MBS spreads as support for this view. Additional support arrived from comments from Mr. Lockhart, Mr. Paulson, and actions by the Federal Reserve. Having lived contently for years with the markets' interpretation of the (grey-area) "implied" government backing of the GSEs, our policymakers are surely today satisfied with the inferred market acceptance of mortgage industry Nationalization. To be sure, the Fed's Splashy "Sunday Night Special" bailout of Bear Stearns is rather trivial in both its implications and consequences when compared to Thursday's Quiet Coup. "
Mike Shedlock of Global Economic Trend Analysis apparantly feels the same way...
"Fannie and Freddie are likely to get into further trouble but it will likely take some time as the housing market continues to deteriorate. Indeed, the actions by the Office of Federal Housing Enterprise Oversight (OFHEO) to give Fannie and Freddie more rope in which to hang themselves are "quiet" step that will play out over time. It's not a waterfall event. Down the road, should Fannie and Freddie blow up, expect to see shareholders brutally punished, just as happened with Bear Stearns."
The real question here is not whether these predictions are right, but if "Nationalization" will do anything at all to help. Not likely. More evidence is surfacing that the country is headed for an even greater credit crisis. Subprime delinquencies are in the 30% range. This is absolutely amazing on it's own, but a recent report shows that Alt-A deliquencies are approaching 18%.
Alt-A loans, for those not sure, are loans where the borrower typically has a decent credit profile, but may be looking for 100% financing or cannot document their income in a traditional manner. Fannie and Freddie slurped up billions of dollars of these types of loans over the past 5 years, effectively tripling the amount of their loan book. These loans are starting to go bad an an alarming pace and according to Housing Wire,
"While non-industry media are incorrectly and inexplicably zeroing in on rate resets as the driver behind the recent spike of Alt-A borrower defaults, most industry experts that have spoken with Housing Wire have suggested that as many as 70 percent of Alt-A loans originated in recent years have been fraudulent.
"It's fraud [that is] now coming home to roost, higher lending limits or not," said one source, who asked not to be named. "Rate resets aren't the problem here, and even if they were, LIBOR is low enough right now that it would ease payment shocks for most borrowers."
That's right... 70% of these loans may be fraud. Really not that suprising and if true... another curveball. How do you help these "homeowners" save their homes? You don't. They probably don't want to anyway.
Is it any suprise that Fannie and Freddie face "severe" capital pressures? No. Not a bit. The bottom line still lies with the fact that a severe amount of fraud in an already loose credit system helped to perpetuate the largest housing bubble this nation, and in fact, the entire world has ever seen. Now the perpetrators of this fraud are attempting to cover it in every way possible. It's funny how the truth has it's own way of finding the light.
Denniger's blog, Market Ticker, sums up the coming days and weeks:
"Confidence is, at this point, basically gone."