Fannie Mae & Freddie Mac Collapse
About 5 weeks ago I suggested that both Fannie Mae and Freddie Mac were going bankrupt and their shares were going to hit single digits in 12 months. Well it looks like the market believed that too and their shares were punished. Instead of having to wait a year, the stocks dropped like bricks within the month!
According to Nouriel Roubini, renowned Professor of Economics & International Business at NYU’s Stern Business school, this is the worst financial crisis since the Great Depression and the worst U.S. Recession in the last few decades.
The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression
Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.
Wow, those are strong words! Practically every stock in the financial sector has jumped today, probably due of extreme oversold conditions and not because of any underlying change in the fundamental scenario.
Sadly, my beloved Oil & Gas stocks are down. It may be a sector rotation out of energy stocks and into the financials. But so long as my Canadian Income Trusts continue to provide me with dividends and passive income, I’ll continue to hold them.
But I might enter new short positions in the financials if the stocks rally significantly above these levels. Fed Chairman, Ben Bernanke announced today that FNM & FRE were “in no danger of failing”. I don’t know if I believe him – sounds just like a few months ago when the government telling us there’s no recession. Meanwhile everything (except housing) is getting more expensive and unemployment is rising. And as Jim Rogers
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July 16th, 2008 at 1:24 pm
I think that the best opportunity to buy FNM and FRe will be when they cut their dividends..
July 16th, 2008 at 1:30 pm
I compared Fannie and Freddie to Enron in 2006: http://www.erica.biz/2006/erica-predicts-your-news-headlines-for-2007/
We got it “right” — unfortunately for every US citizen.
-Erica
July 16th, 2008 at 4:12 pm
In you opinion, what does this mean for oil, food commodities, gold and silver?
July 17th, 2008 at 9:04 am
The governement is going to tell us whatever they can to keep us calm. You should do a post about what you think are the safest stocks to hold during this time, if any.
July 18th, 2008 at 2:38 pm
If your bearish on the entire financial sector, check out the ProShares Ultrashort Financials (SKF). I believe it aims for a 2% increase for each 1% decrease in some financial index.
July 21st, 2008 at 11:23 am
Interesting post, I wonder if Peter Lynch still has a picture of the Fannie Mae office on his desk . . . Hopefully FNM will be around to make us some money in the future.
August 4th, 2008 at 8:29 pm
Yeah, I just watched another video interview today from WSJ with Nouriel Rubini. He’s a pretty smart guy.