Seizure. Takeover. Nationalization. Bailout. Rescue? Whatever word you want to use for Sunday's move, Fannie Mae and Freddie Mac are now the property of the U.S. Government.
Despite the inherent magnitude of such a step, its mastermind, Treasury Secretary Henry Paulson, is pretty nonchalant. After announcing that the two largest mortgage providers in the nation would become wards of Washington on Sunday, Paulson told CNBC on Monday that there was "no specific analysis" of effect on taxpayers and shareholders.
Yet he ventured that when all is said and done, we citizens could turn a profit on the deal! How? As Hank Paulson continued, "We didn't sit there and figure this out with a calculator."
Who needs calculators when you've got guts, right?
Well, some of us would like to see a tabulation, assuming there is still a balance sheet left somewhere in D.C.
And just because Wall Street turned its frown upside down on Monday doesn't mean this was the best way to nudge the market. What people want to hear and what they need to hear are usually two very different things.
The Credit Crisis Hasn't Cooled Down
Undercutting the confidence that the Treasury's wholesale buyout / takeover is supposed to instill is the executive purge at both Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), plus the ouster of Washington Mutual's (NYSE:WM) CEO Kerry Killinger.
Such a handover of management from incumbent blunderers to government hands—or in WaMu's case to no one in particular—should not in a million years lead you to believe we're safe and sound.
American taxpayers are now holding a microwaved hot potato that is still cooking and could get hotter. Since no one in credit markets wanted to get burned (the credit default swap settlement now set to unwind on Fannie Mae and Freddie Mac will be the largest ever), the Treasury decided to stick it to the whole country since we have no single voice to cry foul. That's especially true in this election year.
The Fannie Mae - Freddie Mac Government Takeover
In this takeover, the U.S. government now takes ownership of billions of dollars of mortgages, which are still resetting. And when the onslaught of subprime resets in option ARMs (adjustable rate mortgages) runs its course from 2009 to 2012, and Americans default on them, American taxpayers will be left dangling and responsible for it.
As our Ian Cooper said this spring, "The lending market has not bottomed... nor has it priced in all negativity."
That was back in April, and five months later the Treasury is now trying more forcefully than ever to delude the markets into an upswing.
Former Fed chief Alan Greenspan got it right last week when he argued against the prevailing wisdom in Washington that the Federal Reserve and Treasury Department can mop up every market mess.
Politicians and investors alike are starting to recast government bodies that should be lenders of last resort instead "as a wondrous new font of seemingly costless federal funding — a magical piggy bank."
It's not magic, it's intervention. We don't expect the rescue rally to last—no matter how Paulson and crew try to spin the Freddie - Fannie takeover—and 11,000 for the Dow is not far off. We'll keep you up to date with the latest.
Wishing you a good week,
Your no-hocus-pocus Wealth Daily team
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