Monday, July 14, 2008

DeathWatch on the GSEs

Another apocalyptic day just passed in the market and another one just like it is shaping tomorrow. "Terrifying day of trading" says John Authers of the FT and the coverage is that the bailing out of Freddie Mac and Fanny Mae, who insure half of the mortgages of the US, is not enough to calm the markets.

From the FT

The US Treasury’s plan to bolster the two mortgage giants with extra liquidity and the pledge to buy a stake if needed, announced on Sunday, helped to steady the nerves of bond investors who queued up to buy Freddie debt.

But equity investors remained unsettled amid concerns that the two companies, which guarantee $5,300bn in mortgages – almost half the US home loans market – were still vulnerable. Fannie and Freddie shares saw early gains wiped out and ended 7.6 per cent and 8.4 per cent lower, respectively.

The equity gets wiped out but the debt remains attractive because it is guaranteed by tax-payers. The spread is 200 bips and the risk is nil?

I have a morbid fascination watching this movie unfold. It feels like one big train wreck in slow-motion. I wonder if one day we will tell stories of "this is how it all went down" or we will tell stories of "don't panic, once I thought the world would end, and guess what, it didn't!"

I still stand by my earlier call: wait for the shoe to drop, wait for it, wait for it. Shoe will drop. FED will commit final balance (another 400B minus what they just committed here). And then it is on our own, UNLESS the FED resort to presses, which... I don't think they will. In the meantime part of the US financial infrastructure is being nationalized.


Tom said...

Looks like you won your bet. Dow below 11,000!

Wayt said...

Next up: carnage amongst the regional and small banks as commercial property problems are added to the residential property problems. And the commodities bubble will continue to inflate for months to come. Where/when to get into the big brokerage stocks? Now? I'm afraid I'd be catching a falling knife. But Citigroup below 15 is pretty tempting. Nah, I can't do it, I'm a chicken-shit and I'll just sit on the sidelines (in bonds) until the fear turns to greed again, as it always does. nobody knows, and if they say they do they are charlatans.

Tom said...

You have to be in bonds if the Gov't favors bond holders over equity holders. They will let the stocks go to zero but they won't want the company to default on their debt. Even if they go BK, the bond holders get paid before the equity holders who are typically last unless you hold preferred shares.

Marcf said...

I do keep a little bit of equity exposure. It is a loss harvesting product. It works really well these days :) it is generating tons of losses which offset income from a tax standpoint. It an optimizer for my fixed income. I stop short of shorting... It is ironic though that my equity is there to generate losses.