Saturday, September 06, 2008

Government To The Rescue!

If you haven't heard already, it looks like a government bailout of Fannie and Freddie is imminent. Important details (like the fate of shareholders) are not available as of yet, but there's a ton of speculation going on. Calculated Risk and Naked Capitalism will be on top of the story all weekend. The only opinion I would like to add is I think this signals the upper limit to what the government is able to do to stabilize the financial system. By taking the GSE liabilities onto the treasury's balance sheet, the feds have picked their pony, and the rest of the weak will soon fail. Combined with the huge loss severities of the recent failed banks, and you clearly had a government that was stalling for time.

We're about to enter the next phase of the crisis.

5 comments :

Darth Toll said...

Here's how shankar over at accruedinterest put it:

"Here's how it probably will unfold:

Now that they have nationalized GSEs and although we may see a sharp rally in equities for next few days, the Government finances are going to be in a tailspin. It means that the Fed will squeeze the liquidity and push everyone into bonds (and out of equities). There you have your treasury bubble. (aka Crowding Out of Investment by the Government).

And in due course (a few months to a year when foreigners realize that they are holding toilet paper instead of AAA rated bonds), that bubble will blow up and the ensuing tsunami will take down everything in its path.

Why do I think it will happen this way? Just look back at 20s/30s.

The history is being repeated and the Fed is simply following the playbook for The Great Depression again.

Enjoy."

Folks, this is crowding-out at it's finest, and will be an unmitigated disaster for the economy and RE. Also, if everything is going to be funneled through the FHA, how long before that is bankrupt? 30 days? 90 days? They can't do that kind of volume, with the GSE's currently doing 90-95% of the current mortgage lending. Mortgages, regardless of the interest rate, just got a whole lot harder to qualify for and more scarce.

The next phase of the crises is right Max, and it looks to be a real killer. Got Cash?

Anonymous said...

We needed GSEs active in the higher end of the market, up till recently, they left the private markets to handle California.

Regarding their "overstating assets" I can just imagine it now..... that means that items that should have been expenses/costs, etc. became assets, increasing profits, increasing bonuses..... out with the bums!

Anonymous said...

Sippn

wannabuy said...

Mortgages, regardless of the interest rate, just got a whole lot harder to qualify for and more scarce.

The next phase of the crises is right Max, and it looks to be a real killer. Got Cash?


Exactly. Mortgages just became far tougher to qualify for. Down payment requirements are going to explode.

Suddenly Jumbo buyers... will have to be the type of buyer who traditionally was a Jumbo buyer!

Got Popcorn?*
Neil

* Man... watching this is like watching a horror movie now.

Patient Renter said...

It means that the Fed will squeeze the liquidity and push everyone into bonds

This is an interesting idea. If this were to be how things go, what are some potentials plays on this?