First Fannie and Freddie: As EVERYONE knows by now, Fannie and Freddie were taken over by the Federal Government last Sunday.   What does that mean?   A couple of things that have become clear so far:  1) The fact that US government is now not only implicitly backing Fannie and Freddie’s debt but explicitly (putting your money where their mouth is) has had a good effect on mortgage rates.   We dropped as much as .5% on Monday and since then, things have trickled back up a bit, but we’re still .25% lower than we were last Friday.   2) One of the reasons that they did it was to keep the mortgage markets moving and that appears, at least so far, to be a success.

The things that aren’t so clear yet about the Fannie Freddie bailout are: 1) How much is it going to cost the taxpayers long term?   2) Are the executives really going to get the multi million dollar golden parachutes that it looks like?  3) Starting in 2010, Fannie and Freddie are supposed to downsize by 10% per year.   What sort of mortgage market is going to take their place?   That’s going to be a topic of a lot of discussion in the government going forward.

Now on to what else is effecting the markets.   Let’s just say that it is looking like Fannie and Freddie won’t be the only financial firms that are going to suffer a financial death during the month of September.   Here’s the latest as I know it:

Lehman Brothers is rumored (LOTs of rumors) to be on it’s death bed.   What killed it?   Too many investments in risky mortgages.    They are supposedly looking for buyers who would save them from the untimely death.   Will someone step in and buy them at the last minute?   Maybe…..  Who are the most likely buyers?   The rumors have Bank of America and Goldman Sachs as the buyers.   Will they buy them at market value?   Uh, probably not!

Washington Mutual – While they are still maintaining that they are a strong bank, the market doesn’t really believe them.   Their stock prices have gotten hammered lately, the ratings agencies have downgraded them, they are operating under a Memorandum of Understanding with their regulators (that’s sort of like a note from the principal) and it doesn’t look likely that they’ll be able to remain a complete entity.   What’s the most likely scenario?   A couple of them that have come out in the rumor mill on Wall St:  1) There are probably one or two banks who could be big enough to buy them in their entirety (Chase being the most likely one).   2) They sell off chunks of the bank to a variety of different entities.   For instance, Citibank might buy their deposits and branches in one state,  Chase might buy another, etc.   3) The FDIC comes in, shuts them down, opens them as a new entity and eventually parcels them out.    Just to give you an idea the size we’re dealing with, the shut down of Indymac was the largest failure since 1984 and I’ve heard reports that Washington Mutual is 10 times the size of Indymac.  Oh, and what’s the biggest problem with Washington Mutual?  Too many risky mortgages.   Sound like a recurring theme?

So what difference does this make to those who don’t have stock of Lehman or Washington Mutual?   A couple of thoughts:

1. It shows that the credit crisis isn’t done and the ramifications of it are spreading further and further.

2. It raises questions about the Federal Government’s role in the financial services sector. Should the government help stem some of the losses with Lehman Brothers and WaMu?   It’s reported that the FDIC is going to lose $9 billion (no that’s not a misprint) on Indymac.   If WaMu is 10 times that size, would the loss be that big?   Can the government afford to step in on something like this?   Can they afford not to?   No easy answers to that question.

3. If Lehman and WaMu go down, what will the ramifications for the rest of the financial world be?   Will it make lending become more cautious?   Will that in turn cause more problems?

A couple of other economic reports came out (though it’s been a light week for those:)

1. Retail sales came in lower than expected. Apparently people aren’t feeling much like shopping right now.

2. Wholesale prices came in lower than expected - mainly due to the lower cost of fuel (though Hurricane Ike could change that!)

3. Consumer Confidence came in better than expected – mainly due to lower cost of fuel (though Hurricane Ike could change that!)

A lot more questions than answers this week, and it’s that way for a couple of reasons:

1. We’re in the middle of an unraveling situation and it’s hard to know exactly which way things are going to fall with those issues.

2. I hope that people at the Treasury and the Fed and many other places of importance are asking questions and really assessing what the best course is.   I’m afraid that if the government becomes the lender of last resort for these types of things, we are all going to regret it in the long run.

Have a good weekend and say a few extra prayers for those in the way of Hurricane Ike.

Until next time….

3. The government did this to prevent the mortgage markets from seizing up.   That was a necessary step because having a mortgage market that keeps lending money is crucial to eventually working through the housing debacle that we are in.   However, there are substantial issues in the mortgage world that aren’t being solved by the takeover.

4. No substantial changes in programs or underwriting guidelines.   The goal of the bailout was to keep Fannie and Freddie functioning and that will happen, but it’s not going to make credit a lot easier or downpayment guidelines lower.   Let’s face it, Fannie and Freddie weren’t making any money doing things the way they used to, so I don’t think we’ll see a return to that.

5. As the markets realize that the fundamental issues in today’s housing/economic/credit market crunch haven’t gone away, we’ll see the euphoria of the first day or two slip and the value of the bailout will diminish.   However, it will continue to keep the housing market moving so we can attempt to work through the inventory issues and eventually find a bottom and start building from there.

Is this the silver bullet that is going to answer all of the housing market and economy’s problems?   Sorry, I wish it was, but I don’t see it that way.  It was basically the implementation of what the markets felt was coming any way.

Until next time….