Wednesday Wipe Out

Are we there yet?

It's hard to find a bottom in a bottomless market.  We had today what Tom2oc calls "A Frightful Blind Date – This TA event occurs when the market reverses an opening retail accounts panic triggered by an adverse news (CSCO) which is quickly forgotten."   We also had the continued hammering of FNM and FRE because FNM raised $3Bn and had to pay investors a 3.72% yield.

3.72% – why that is shocking!  Or is it?  So FNM, despite all the trouble and fear surrounding the industry, despite record high inflation and record lows in the dollar are able to raise $3Bn at just 24% above the rate of a US treasury note (which itself is at record lows).  This was a non-dillutive raise of capital so the net effect of this is that investors consider lending money to our GSE's, whose only assets are (gasp!) mortgages, to be just 24% riskier than lending money to the US government, who pay 3% if you lend them money for 2 years.

Now we get additional hyena action as much is being made of the fact that the Bush Administration (pause, waiting for booing and hissing to stop) has made contingency plans for what to do if FRE and FNM fail (if it's anything like the administration's other plans, then I'm sure the "solution" is to do nothing but talk about it a lot while pushing for more tax cuts).  Seriously, this is the government, they are SUPPOSED to make contingency plans and how the fact that a backstop is in place for these agencies is spun as a negative is beyond me – this market is in panic mode and facts take a far back seat at the moment.

According to the WSJ: "The government doesn't expect the entities to fail and no rescue plan is imminent, these people said. Government officials and market analysts expect both companies will be able to raise large amounts of capital relatively easily. Treasury officials are nonetheless talking about what the government could — or should — do if Fannie and Freddie become so pressed that they are unable to borrow money and continue operating."

FNM and FRE hold $5Tn worth of debt, 50% of the US housing market's total debt.  The value destruction of these two agencies forces them to turn to private investors to raise capital, who will pick up the debt literally at 10 cents on the dollar.  This is the end game of the land grab that has been executed by the top 1% that I have been warning you about for 3 years and that Thomas Jefferson warned us about 233 years ago when he said: "If the American people ever allow the banking system to control their money, first by inflation, then by deflation; their children will one day wake up homeless on the continent their fathers conquered."

You don't own your home, you OWE a bank for your home and, for half the people in America, that Bank is ultimately FRE and FNM who were allowed to to grow their outstanding derivatives from $700Bn in 2000 to $5Tn today despite warnings from Greenspan that they were getting to big and an accounting scandal that caused FNM not to file an annual report from 2002 to 2006.  As with our last Bush S&L scandal, these institutions were allowed to run wild, INFLATING housing prices with easy lending policies and sucking up the wealth of the nation, which transferred ownership (through lien) onto the books of these two institutions, whose values have now been DEFLATED allowing private wealth to swoop in and take possession of 1/2 of the property in our county, effectively becoming bigger landlords than the kings of foreign lands for 10 cents on the dollar.

So let's go through this process.  Americans own homes and owe the banks $5Tn in 2000.  We double the "value" of the homes through a series of very stupid ecomomic policies and then, when housing prices are out of control we use Phil Graham's Enron loophole to create insane debt instruments that allow them to go up even further.  Early home speculators dump homes at a protracted top that is kept alive by a Fed that keeps dropping rates to unsustainably low levels along with a government mandate to "increase home ownership" run by Bush croney Alphonso Jackson (who resigned in a scandal) and the Fed chair went as far as to endorse ARMs as to say (2/23/04) "Overall, the household sector seems to be in good shape… American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."  For Greenspan, that was a ringing endorsement!  This led to an explosion of high-risk loans and lax lending standards did the rest.

This caused US homeowners to double their mortgage debt from $5Tn to $10Tn, the bulk of which was sucked up by FRE and FNM gone wild.  Now that the American people took on $5Tn worth of debt and signed their land over to these institutions, it was time for the DEFLATION Jefferson warned us about and rapid attack on the financials has allowed the bankers of the ultra-rich like JPM to take out smaller rivals like BSC and now they are poised to take control of FRE and FNM and their $5Tn virtual portfolios for a combined market cap of $20Bn – Mission accomplished!

I'm sure it's all just an innocent coincidence that begins and ends in an eight-year cycle that coincides with the Bush presidency.  Yeah, it could have happened to anyone…  I think even his dad had some bad luck with the banking sector as well and his brother Neil had a spot of trouble if I recall.

As usual, you'd think I'd be more pessimistic but I'm not.  Our long national nightmare is finally coming to an end (until Jenna is ready to run for office) and the mission has indeed been accomplished with the nation near collapse and all the people indebted up to their eyeballs to a priviledged few and forced to pay huge portions of their income for necessities like food and energy.  Like any good farmer, these crooks know not to overwork a field and they will now allow us to recover a bit so that we can make our loan payments and save a little money for the next great robbery, probably of the Social Security system next time (they took a stab at it this time and failed to toss it into the market).

I'm concerned the game will not really be over until we do see FRE and FNM "rescued" by the private sector, who will buy out those institutions with their grossly inflated dollars.  JPM's Dimon has warned us that other failures may follow and that worries me as well.  I though LEH escaped the attack of early June but they are still down at $20 and still a potential takeover target so we're not going to mess around with financials, just following our plan to hold the ones we have. 

What we will do is concentrate on companies that do provide good, solid values and are oversold and there are plenty of candidates there.  That's another reason I remain optimistic because, as I prepare for the mid-year Long-Term Virtual Portfolio Review, I see PLENTY of great bargains and I see an economy that is still held down by that ONE thing, that's ready to move on once this raid on American assets winds itself down.