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Fannie Mae & Freddie Mac - Sunday Update

We have learned that there will be an announcement of some kind at 11:00am (US EST). Supposedly it will be Hank Paulson and the Federal Housing Finance Agency Director James Lockhart who will make the announcement.

Speculation of what the plan will be has been running wild to say the least. And the resulting impact to the bond markets, currency markets, and the equities markets remain in just as much ‘cloud of uncertainty” as well.

The NY Times broke a story that Fannie and Freddie have been over stating their capital reserves. In other words they have been lying all along as to how well capitalized they really were. And you know we have been telling you for many months that there was no way that their capital reserves could be healthy.

Here is part of the NY Times article:

The government’s planned takeover of Fannie Mae and Freddie Mac, expected to be announced on Sunday, came together after advisers poring over the companies’ books for the Treasury Department concluded that Freddie’s accounting methods had overstated its capital cushion, according to regulatory officials briefed on the matter. (emphasis added)[...]

[...]Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.[...]

The Full NY Times article can be found HERE

It may very well be that Fannie and Freddie were so close to a complete failure that the Government had to step in NOW. Or, it could also be all a big ‘master plan’ that is orchestrated to give the markets something to cheer about and create a rally as we head into the last 2 months before elections. It all depends on WHAT the plan announced is, and just how it is perceived by the markets.

From my point of view ANY intervention by the US Government into these two companies is nothing short of a complete bailout and places great risk upon the tax payers of this Country.

Lisa and I have written for many months about how the credit markets have been deteriorating with each passing week almost. Mortgage delinquencies have been rising, yields on bond sales by Fannie and Freddie have been rising (equating to higher risk), and the entire mortgage (and housing market itself) has been falling apart rapidly.

Will the bailout of Fannie and Freddie create a “whoopee, lets rally” in the equities market as risk will be thought to be forever ‘backstopped’? Or will the recognition of just how dire the situation has become be a “oh crap” and create a massive sell off in equities as the acknowledgement of just how bad the conditions have become forces people to unload shares of anything tied to financial institutions?

This will indeed be a monumental day and one for the stock market history books.

The US Government needs to stop handing out OUR money to any company that screws up. I run my own company, can I go to Hank Paulson and ask for free money too? Hey.. let every company in America just go about reporting false income statements, keep the common shareholders happy, keep ripping off the public, and then when it all falls apart go to Paulson and ask him to fix everything.

Free enterprise and free markets… my ass.

Chime in with your thoughts…