What's going to happen to the mortgage twins - Fannie and Freddie? Yesterday, investors got nervous. They wanted to know. Would the feds officially nationalize them? No one believes the two will disappear. But no one knows on what terms they will be saved either. Both stocks sold off yesterday - with Fannie taking a 27% whack...and Freddie getting hit for a 22% loss.
The feds let it be known that they stood behind the two back in 1968 - when they were set up in their present form. They were no longer on the government's financial books, but every lender knew they wouldn't be allowed to go broke. So far, Treasury Secretary Hank Paulson has counted on that implicit guarantee - along with a long line of credit - to keep the two going. But now that investors are selling off the stock, he may have to come up with some real cash to put on the equity side too.
As reported here - we still have trouble believing it - Fannie and Freddie are each in the red by about $50 billion. They're about $100 billion short, in other words. And judging by yesterday's trading, private investors are in no mood to ante up. Which leaves good ol' Uncle Sam. He's not very bright; but at least he has very deep pockets...and a printing press in the basement.
But that still leaves an open question: the feds may be forced to take back Fannie and Freddie (they were publicly owned prior to '68), but at what price? At $10 a share? Or $2 a share?
Apart from Fannie and Freddie, stocks generally rallied Wednesday. The Dow rose 69 points.
Oil rose to $116. Gold rose too - to $822.
Gold is down nearly 3% for the year. But our Trade of the Decade is still, technically, up - since stocks are off 14%.
Gold is the "the epitome of human stupidity," said an opinion in the Telegraph newspaper. "A metal that is dug out of the ground at great cost to be reinterred in bank vaults as a protection against the same stupidity as caused it to be dug up in the first place."
The writer is right. Gold is useful because humans are stupid. That's why it is always useful; because humans are reliably numbskulls. And it is particularly useful when humans are particularly stupid. Remember, a correction is equal and opposite to the deception that preceded it. When people have deceived themselves in an especially monumental way, the following correction is a doozy. And that's when you want to have some kruggerands in your pockets and a little bolt-hole in South America.
We never know what will happen, but we'll stick with our Trade of the Decade a while longer - just to see how it turns out.
Bill Bonner
for The Daily Reckoning Australia
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Related Articles:
- Fannie and Freddie in a Free Market Economy
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- Fannie and Freddie are Finito
- Freddie and Fannie Hit Hard as Stock Falls to its Lowest Since 1995
- The Feds Are Counting on Fannie and Freddie to End the Nation’s Housing Misery
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by jack carter on 26 August 2008:
What you have not said, and the USA refuses to admit, is that the GSE are political instruments for the control and looting of the body politic. And by the way, the GSE are a bribe to the Wall Street Bankers who needed to both lay-off their mortgages and spin-up the rate of mortgage formation to make more money. Make no mistake this did not just evolve, it was designed and executed with care and the participation of Congress. True, it got out of hand due to the success experienced; but no one foresaw the political joy it accomplished for liberal politicians, and the poor and lazy in USA society. Dare I say it was an unexpected miracle? Or so it seemed.
On the other hand,it is a painful view of the convoluted economic-political system that was and is at the heart of the American way of life. It shows the partnership of state and capitalism in its most creative and dangerous form. But now its run its course and been exposed. It is A Fraud on the taxpayers.
Can the partnership be repaired? Who knows? However we can say it should not be fixed. Private banking is either adequate for shelter provision, or the Republic is ended. The GSE model is an engine of destruction for democratic government; it is a device for the looting of the working class by the leisure-unproductive class. This is the crack through freedom in the USA will fall.