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The Freddie And Fannie Calamity

Written By Brian Hicks

Posted September 9, 2008


It has been whole three days since Freddie and Fannie basically slipped beneath the waves.

And 72 hours later, the markets have only shrugged. All of Monday’s 274 point rally on the Dow has now been surrendered back to the bears.

At the close yesterday, the Dow was off 278… and just about flat at today’s close. Bear Stearns Part Two this was not.

In fact, by comparison Bear Stearns was nothing more than a blip. Shareholders in the Bear collapse received $10/share and the taxpayers may “only” be on the hook for $29 billion in that mess.

Meanwhile, Frannie shares are under a buck and the taxpayers are liable for a $200 billion hit.

And if you believe Hank Paulson when he says that we won’t feel a thing, you need to check yourself in somewhere as soon as you finish this sentence.

The truth is it will cost every penny of $200 billion and them some. So get to work America, Hank Paulson needs you.

Of course, the larger picture in the Freddie and Fannie failure is this: anyway you slice it, it is an absolute calamity. And the truth is it doesn’t mark a bottom, but foreshadows a bigger situation that is only going to get much worse.

That’s because it wasn’t some accounting error that killed these two—not by a long shot.

Instead, it was a housing market depression, the worst one we have ever seen. And in the end that was the only thing that ever could have killed them both, otherwise they would still be with us.

And all it managed to do was take down the two biggest components of the mortage industry in the blink of an eye. Serious business.

Yet for some reason, the markets briefly rallied, which was insane. This was definitely no moment to cheer.

Reflect maybe. But rally no way.

So today we wake up with the realization that nothing has changed. Housing still has further to fall and the financials are more dangerous today than they were last week.

After all the same thing that killed Freddie and Fannie infects them all.

Of course, the question now is whether or not they can stand up to the same scrutiny as their departed brothers.

Here’s a bet they cannot.

That’s the reality the markets are forecasting as the pros fade any and every rally.

In fact, here’s part of the skinny on that score from Bloomberg.

It’s in an article by Kyung Bok Cho entitled: Credit Suisse Says Stock-Market Advance Won’t Last

“Investors should sell stocks after the steepest global surge in almost five months because the housing slump will keep curbing growth in the U.S. and Europe, according to Credit Suisse Group AG.

The U.S. government’s takeover of Fannie Mae and Freddie Mac drove the MSCI World Index of developed-market stocks to a 2.2 percent gain yesterday, the most since April 16. The rebound won’t last because the U.S. housing crisis, which caused the first nationwide decline in home prices since the 1930s, will persist, Credit Suisse’s London-based strategists led by Andrew Garthwaite wrote in a report. Also, Europe and the U.K. are “close to recession,” they added.

“U.S. house prices probably need to fall another 10 percent to 15 percent; it will take about 2 1/2 years to absorb the excess housing inventory,” the report said. “More importantly, the problems over the summer were not U.S.-related.”

Fannie and Freddie, which make up almost half the U.S. home- loan market, were seized after the biggest surge in mortgage defaults in at least three decades. Investors had been concerned that failures by the companies would push losses at financial institutions around the world even further past $500 billion.

The MSCI World lost 0.4 percent to 1,291.89 at 10:06 a.m. in New York. In the U.S., the Standard & Poor’s 500 Index added 0.1 percent to 1,268.66.

Credit Suisse maintained its year-end estimate of 1,300 for the S&P 500, the benchmark index for American equities. Investors shouldn’t buy until it drops to 1,170, the report said.”

So see you at DOW 10,000.

And when we get there make sure you thank the fellas that gave us this mess—-The greedy banks that are getting bailed out.

So much for the free markets. We have all been duped.