Oh Well
No surf report today - I freaking overslept and just didn't have time.
Well, the first part of my predictions came true - I got taken out on both SKF and SRS about one dollar before they turned around and are both now positive for the day. Shoulda seen the shorts covering action but I missed it. But I bought rightback in as they started moving up, but have reduced my positions. Although, after Reading what Jim Rogers, co-founder of the Quantum Fund and widely regarded as one of the world's brghtest and best investors had to say about this propopsed bail-out of Freddie and Fannie, well, I may add.
From Bloomberg.
Fannie Plan a `Disaster' to Rogers; Goldman Says Sell (Update2)
By Carol Massar and Eric Martin
July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.
Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Goldman Sachs Group Inc. analyst Daniel Zimmerman predicted the mortgage finance companies' shares may fall another 35 percent.
``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''
The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.
Rogers, a former partner of hedge fund manager George Soros, predicted the start of the commodities rally in 1999 and started buying Chinese stocks in the same year. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''
Stocks Rise (Maybe when the story was written, but not now - DTS)
Fannie Mae and Freddie Mac each surged more than 20 percent in pre-market trading today after Paulson moved to stem a collapse in confidence in the two companies that purchase or finance almost half of the $12 trillion in U.S. home loans.
``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''
Freddie Mac rose 22 cents, or 2.8 percent, to $7.97 at 10:13 a.m. in New York Stock Exchange trading, while Fannie Mae rose 73 cents, or 7.1 percent, to $10.98. Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.
The Federal Reserve separately authorized the firms to borrow directly from the central bank.
Last Week's Slump
Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.
Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.
Goldman's Zimmerman said today the U.S. government's plan to rescue Fannie Mae and Freddie Mac won't benefit shareholders. He lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17.
Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.
The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.
``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''
Well, fuck. I just bought more of both and will be watching them but the consensus on the street is that the ficnancial mess is getting worse, not better. All the big banks, from Wachovia to B of A to Wells Fargo report earnings this week and it is a sure bet they will have to raise capital when they announce bigger than expected losses - what if they can't?
Lots of volatility, I sure wish I hadn't set my limit so tight this morning, but hidsight is always 20/20, eh?
Also, you may have heard the story of IndyMac, the large So Cal bank/mortgage lender that the Office of Thrift Supervision seized and shut down this past Friday. Well, here's part of the story you probably didn't hear.
The F.D.I.C., which insures depositors money in banks, has a list of 90 banks that they deem as being likely to fail.
Guess whihc name was NOT on the list? IndyMac.
Yeah, sure sounds like they know what the fuck they are doing.
Labels:
IndyMac Bank,
SKF,
SRS
1 comments:
Here's another article along the same lines that you have been telling us. Thought you might like to read it.
Fannie and Freddie:
The Worst of Both Worlds
“They own or guarantee $5 trillion worth of mortgages -- nearly half of all the country's outstanding home loan debt -- and they're crashing.”
- Fortune magazine
As U.S. mortgage lenders tumble further into a black abyss, there is one question to ask: Got gold?
Stock futures are rallying this morning on news of a government rescue. Fannie and Freddie shares (tickers FNM and FRE) are up, too, in European trading. It appears that the Treasury and the Fed are ready to step in once again... and investors are cheering the rescue.
But what does the news really mean?
On Friday, the Fed seized the assets of IndyMac, an S&L mortgage lender whose failure counted as the second- or third-largest bank bust in U.S. history (depending on whom you ask).
Now the plan is to save Tweedle Dum and Tweedle Dee -- er, make that Fan and Fred -- by opening the Federal Reserve discount window to the two companies, and getting authority from Congress to buy “unlimited stakes” in both.
In other words, taxpayers are on the hook for a blank check once again. This is Bear Stearns on a bigger scale. “Too big to fail” is becoming an epidemic.
How Did We Get Here?
So how did we get into this mess? “Stupidity” is one word that immediately springs to mind. Others are greed, foolishness, myopia, idiocy, and so on. You get the picture. The sheer larceny of it all speaks volumes as to why you should own gold.
The thing to understand about Fannie and Freddie is that their special deal wound up being the worst of both worlds.
The gray area both resided in -- not exactly public institution, not exactly private enterprise -- has produced the ultimate in bad results for taxpayers (you and me), while lining the pockets of countless politicians and insiders on the road to fiscal ruin (the place we’ve just arrived).
To better understand, let’s take a look at Fannie Mae, the Federal National Mortgage Association (as little brother Freddie basically followed in big sister’s footsteps).
Here is the bottom line: As a “quasi-government entity,” Fannie was always seen as “too big to fail.” What’s more, Fannie enjoyed implicit backing from the U.S. government… the very strong hint, though, not the spelled-out promise, that its finances were guaranteed by Uncle Sam.
This quasi-public status and implied guarantee helped Fan sell massive amounts of debt at super low interest rates.
The thing is, Fannie was also a private company with stockholders, a share price and a profit-driven culture. This created an intense pressure to drive profits higher. Everyone from Fannie Mae execs to big shareholders wanted to see rising earnings, a rising stock price, and so on.
A Hedge Fund in Drag
In the mid-1980s, Fannie Mae almost went under thanks to horrible management of its loan book. Then a new (and much smarter) team stepped in and brainstormed on how to get profits up.
The new managers quickly realized what a huge asset they had in terms of the public/private straddle. This unique deal let Fannie borrow huge sums from investors at piddling interesting rates. The rock-bottom borrowing costs meant they only needed a few percentage points of return to make a lot of money.
Here’s how it works: If you have a super-safe strategy that earns you, say, just 0.5% a year, you can still get very rich. All you have to do is borrow huge sums to magnify the return.
If you can borrow, say, 40 times your original capital and plow it all into your 0.5% strategy, then all of a sudden you’re making 20% a year (0.5 at 40x leverage = 20% return).
This is pretty much what Fannie Mae figured out... that they could borrow insane amounts of money thanks to their public status, plow the borrowed funds back into mortgages for a slightly higher rate of return, and basically operate as a hedge fund in drag.
After Fannie figured out the public/private “hedge fund in drag” strategy -- and Freddie copycatted it -- the sky became the limit in terms of profits. Fannie’s share price had risen many thousands of percent from its 1980s low, and that was just the start.
In fact, the only real limit on profits, it seemed, was a lack of mortgage loans to buy. Fannie was getting so big, there was a danger of buying up too much of the nation’s mortgage pool. It might look bad in the eyes of the public for a quasi-public entity to start shoving its private competition aside.
So what did Fannie do?
They figured out how to make the mortgage pool bigger... much, much bigger... by chipping away at the “20% down” feature that traditionally kept riskier buyers out of the mortgage market.
Basically, Fannie started a series of political campaigns aimed at improving the plight of the poor would-be home owner who couldn’t afford 20% down on a house.
Home ownership was as American as mom and apple pie, the campaign argued, and who are we to stand in the way of the American dream just because John and Jane Public can’t scrounge up a hefty 20% down.
The strategy worked like gangbusters; down payments fell, and everyone was happy. Politicians loved it, because more of their voters could own homes. First-time home buyers loved it, because 5% down (or even 0% down) made it so much easier to buy the house of their dreams. Wall Street loved it, too, for obvious reasons.
But Fannie and Freddie execs loved it most of all, because the more the mortgage market expanded, the higher their profits soared into the stratosphere.
As the mortgage market grew by trillions, Fannie’s and Freddie’s mortgage books grew by the trillions, too. Their leverage strategy made Long-Term Capital Management look like pikers. Eventually their eyes got bigger than their stomachs, the market turned with a vengeance, and now here we are staring down the barrel of a housing crisis.
It was pure greed, plain and simple. And we all bought it...
Now we are realizing, the hard way, that there is no free lunch when it comes to the American Dream, either. The dream of homeownership has become a nightmare for millions of Americans.
Just remember this: When politicians and executives and investment bankers get together to do something for the greater good, you can be sure that the first and last “good” that will be served is the good of their wallets.
And that’s why you need to own gold... because this debacle is far from done. In fact, it’s just getting started.
With the Bear Stearns failure, the IndyMac Bank failure, and now the as-yet-to-be-determined Fannie and Freddie rescue, we are paying for the ill-gotten gains of many years prior.
The motto of the players might well have been, “Reap billions now; let others foot the bill later.” Later being right now and the bill-footers being taxpayers... you and me.
If the cost is not paid via the IRS, then it will be paid via rampant inflation, as the printing press slowly turns the dollar into monopoly money.
Cool Hand Hank
As with Bear Stearns, Treasury Secretary Hank Paulson is working to make sure Fannie’s and Freddie’s current shareholders don’t get any love in the rescue.
It was Paulson who originally insisted on a $2 share price for Bear, to send a stern message along with the bailout. (In defending the low price paid, JP Morgan’s CEO later said, “There’s a difference between buying a house and buying a house that’s on fire.”)
We’ll probably see some similar harshness to the Fannie/Freddie rescue... but don’t be fooled. Those who reaped true riches from Fannie and Freddie -- the bigwig execs and politicians -- have already ridden off into the sunset with anywhere from tens to hundreds of millions each. Those hurt by the recent share price collapse are mainly holders of poorly managed mutual funds.
Still, you have to admire Hank Paulson’s game face. As the former head of Goldman Sachs, he’s got a very good one. His stage reaction to the carnage thus far reminds me of the Road Captain in Cool Hand Luke:
What we've got here is... failure to communicate. Some [banks and hedge funds] you just can't reach. So you get what we had here last week, which is the way he wants it. Well, he gets it. I don't like it any more than you men.
P.S. Wall Street keeps wishing and hoping with all its might that the credit crisis is over. With this latest Fannie/Freddie rescue plan, they are wishing and hoping some more. There’ll be no such luck, though... Things are going to get worse before they get better.
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