Running Out Of Options
The battle for stocks was whether the bad news about Wachovia was worse than the good news about oil. Oil won the battle, and stocks rose 135 points at the end of the session. Bonds got hit a little with the bad news about inflation.
The Dollar rose as the FED stated that rates will be hikes sooner than later. Is this just more jawboning to support the Dollar, or is it a promise of action? Time will tell, but history says this is just jawboning.
Oil and gasoline continued their meltdown today, losing more than $3. Gold followed the path of least resistance and also lost $15.
In the news today…..
Wachovia Bank lost $8.9B this last quarter, and is laying off 6350 people. In addition, it will eliminate 4400 open positions and contractor filled positions. Wachovia will no longer offer mortgages through mortgage brokers – only through its own lending officers. Bank of America and National City Corp made this same decision as banks are tightening up on their quality and risk management. Wachovia Bank purchased Golden West Financial in 2006, and continued using the practices of Golden West to lend “negative amortizing” mortgages. Just for the record – these type of mortgages have the poorest payback record of all mortgage types.
US home prices fell 4.8% year over year in May. But, can you trust this report? The calculation uses the Fannie/Freddie index that includes the new high value jumbo loans which did not exist a year ago. So having these higher value loans in the calculation would bias the current number UPWARDS – thereby making a comparison to last year poor at best, and purposely deceiving at worst. SO – You can’t believe everything you read in the papers!!!!!!!!! Therein lies the lesson.
Tonight’s Dinner Conversation….
Fannie Mae and Freddie Mac could cost taxpayers $25B according to Congress’ top budget analyst, stating that there is a 50/50 chance of the Treasury having to put money into these Government Sponsored Enterprises (GSEs). Treasury Secretary Paulson said that housing could “turn the corner in months.”
So, let’s dissect these statements. As a backdrop, there is an urgent bill being pushed through Congress to allow the Treasury to increase their Line of Credit to these GSEs, and to purchase shares in these GSEs. So, is there any possible political overtone here that would bias either of these statements? You betcha!!!!!!! By stating only a 50/50 chance of using taxpayer money, it makes it easier for Congress to pass the legislation. By stating the housing crisis is within months of turning around, it makes it easier for Congress to believe the taxpayer won’t get stuck with the bill.
What’s at stake here??? Well, the FED and Treasury and Congress and the President are all trying to SAVE Fannie Mae and Freddie Mac. That’s because these GSE’s have sold $5+ Trillion of mortgages to the financial institutions of the world ($3+ Trillion to US mortgage institutions and $1+ Trillion to foreign banks). The US Government CANNOT let these GSE’s fail because it would either severely damage, or destroy the world’s economic underpinning. Remember that foreign governments hold Trillions of Dollars worth of our debt, and we want them to continue holding this paper. The US reputation as the safest lender in the world is at stake.
In addition, Fannie Mae and Freddie Mac are ABSOLUTELY REQUIRED to be healthy financially and open to new transactions if the US housing crisis is EVER to turn around. Without them, there just aren’t enough banks holding their own mortgages to service the future US housing mortgage demand, and many, many houses would just not be sold as mortgages could not be obtained. The end result would be further downward pressure on housing prices. Not a pretty picture.
Here’s what the news won’t tell you….
So what does the future hold??? Remember that all the financial institutions and banks holding mortgages are writing off the value of these mortgages as they continue to meltdown. So far they’ve written off over $300B, but much more will be written down before the party’s over. Why is that??? Well, the value of these mortgages is determined by the current value of today’s houses. And, the current value of today’s houses is DECLINING!!! Kind of simple to understand that the value of those existing mortgages will continue to be written down, causing continued economic weakness in those same institutions and banks across the USA. This is not a prediction; it’s a promise.
Now, let’s take the next logical step. Congress WILL pass the necessary legislation. Treasury WILL loan more money to the GSE’s and purchase their stocks. The FED WILL loan the GSE’s any necessary short term loans. The taxpayer WILL pay the bill!!!!
Here’s what I want EconomyGuy readers to learn from this lesson: Government options are running out. The Government can’t let some private companies (Bear Stearns, Fannie Mae, Freddie Mac, and who else????) fail without unacceptable repercussions. Losing the option of bankruptcy is a severe constraint on the FED and US Government.
Here are today’s numbers:
Dow Jones 30 Industrial – 11,603 (up 135 points)
10 Year Treasury Bond – 4.10% (up 0.03%)
Euro – $1.5784
Gold – $949 (down $15)
Oil – $124.95 (down $3.09)
Gasoline – $3.15 (down $0.07)
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