Last Week’s Highlights:
Fannie and Freddie: Implosion
Stocks: Dow breaks 11K, then bounces
Bonds: Yields volatile on Freddie and Fannie news. 10-yr back to 4%
Oil: Holding record levels- $145
Dollar: Weak near 1.58
Date Item Est. Comment
7/15 Retail Sales: 0.3 Weaker
7/15 PPI: 1.3/0.3 Higher it goes
7/16 CPI: 0.2/0.7 Higher it goes!
7/17 Housing Starts: 968K Lower
The Next Two Shoes Have Fallen, Maybe
Late Friday and through Saturday, it was nearly a foregone conclusion that Freddie and
Fannie were about to go under – at least that’s what the stock price suggested. However
these are government sponsored enterprises (GSE) which are viewed as quasi-governmental
agencies- they’re not supposed to go under! The week-end view was that the market would
open today with huge losses. That was Saturday. On Sunday, it all changed.
The Treasury and the Fed came to the rescue on Sunday announcing that Freddie and
Fannie would be able to borrow at the Fed’s Discount window at the same rate as banks and
now big Wall Street broker dealers in order to keep them afloat. Secretary Paulson also noted
that he has asked Congress to authorize additional back stop financing beyond the current
$2.25 billion currently authorized. It’s reported that the two entities now underwrite over $5
trillion in mortgages representing half of all mortgages in the U.S. This is, of course, a
monumental rescue package that eclipses the bail out of Bear Stearns.
This bailout is not only a bailout of two of the most important GSEs, it’s a bailout of the
housing market. While a very, very challenging situation in the near-term, this may be the
step that finally provides the “back stop” to the slide in the housing market. Clearly, this
story is not over, market volatility is not over and the repercussions are vast. However it
does show the ability and willingness of the government to step in, and in very short order,
to stabilize the market with significant liquidity. That liquidity comes at a price the markets
will deal with down stream--such as the ever-present inflation.
Basics:
Fannie Mae was founded as a government agency in 1938 as part of Franklin Delano Roosevelt's New Deal to provide liquidity
to the mortgage market. For the next 30 years, Fannie Mae held a virtual monopoly on the secondary mortgage market in the
United States. In 1968, to remove the activity of Fannie Mae from the federal budget, Fannie Mae was converted into a private
corporation.[2] Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the
new Government National Mortgage Association (Ginnie Mae).
From 1938 to 1968, the secondary mortgage market in the United States was monopolized by the Federal National Mortgage
Association (Fannie Mae), which was a government agency during that period. In 1968, to help balance the federal budget, part of
Fannie Mae was converted to a private corporation. To provide competition in the secondary mortgage market, and to end Fannie
Mae's monopoly, Congress chartered Freddie Mac as a private corporation.
Source: Wikipedia
In the short run, the markets are expected to lift on this news, but investors are as skeptical
as they have ever been and further dislocation is a possibility. For example, Freddie Mac
holds over $32 billion in municipal securities. Will they sell their munis just as the big banks
did last August and send the stable municipal market into another round of “price
discovery?” Lots of unknowns as we open a traditionally lazy summer trading week. Can we
blame all this on global warming yet?
IndyMac Fails
And if that news wasn’t fun: California based IndyMac failed over the weekend as a run on
the bank had to be halted by the FDIC and OTS. IndyMac is reported to have lost $900
million due to foreclosures and declining housing prices. IndyMac becomes the largest OTSregulated
savings and loan to fail, according to the FDIC. It’s reported by the FDIC that the
failure will cost the federal deposit insurance program about $4 billion to $8 billion. The
FDIC intends to sell IndyMac within 90 days. The Federal Deposit Insurance Corp. will run
a successor institution, IndyMac Federal Bank FSB, starting next week, the Office of Thrift
Supervision said. The company was started in 1985 by Countrywide founders Angelo
Mozilo and David Loeb under the name Countrywide Mortgage Investments. In 1999, it
converted into a bank from a real estate investment trust.
PPI and CPI this Week
Look for upward moves in both numbers. PPI should post an overall level closing in on
8%. CPI data should be moving towards 4.5% overall and 2.5% at the core level.
Lighter Side:
Source: Internet
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