Freddie and Fannie Bail-Out Imminent

Every other month, it seems, global markets are teetering on the brink of panic. Central banks step in to calm investors by injecting the credit markets with more money while investors scramble to reposition their portfolios. It’s been a near impossible environment to make money as volatility is intense with every asset class now heading into the basement since commodities peaked in early July. Only U.S. stocks are showing gains since July 15.

Over the last 12 months we’ve seen four global panics triggered by solvency concerns revolving around Bear Stearns Cos., Northern Rock plc, Lehman Brothers, Countrywide Credit, General Motors and, since July, Fannie Mae and Freddie Mac.

On Tuesday, former IMF chief economist, Ken Rogoff, declared a big financial institution will collapse before the credit crisis draws to a conclusion.

This never-ending saga of financial crises has morphed into a monster and, like a bad dream, it just doesn’t go away.

The latest debacle shaking global markets upside down are mortgage giants Fannie and Freddie, which combined guarantee more than $5 trillion dollars’ worth of U.S. mortgages. Without them, there probably wouldn’t be much of a mortgage market.

Until the housing market finally establishes a bottom, Fannie and Freddie are going to remain under pressure. Balance sheets at both companies continue to hemorrhage amid plunging home values and a collapse in mortgage and refinance applications. All three indicators are tanking with home prices down 10% year-over-year and mortgage and refinance applications down a heavy 37% and 44%, respectively. Those figures are outright very bearish and suggest investors have run out of patience with Fannie and Freddie.

Instead of playing political football and jockeying around the bail-out issue, the Treasury and Congress should just bail-out Fannie Mae and Freddie Mac. It’s inevitable anyway. I think the Feds are waiting for the housing market to bottom before officially entering the mortgage business. No dice.

We already know Secretary Treasury Paulson has given the markets an implicit guarantee that the federal government won’t allow these giants to fail; so if that’s the case, just bail them out already. Shareholders will get wiped-out in the process and the United States will officially be in the mortgage business.

Credit markets remain on edge. Stocks worldwide are plunging, non-government bond markets are reeling and most commodities remain in a vicious downtrend since hitting multi-decade highs in July. Deflation, not inflation, is now the markets’ primary focus. Housing woes are adding pressure to deflationary trends in the United States and now, Europe. Again, the main threat since July to global markets is deflation.

The federal government will bail-out Fannie Mae and Freddie Mac with taxpayers naturally funding most, if not all, of the bill. If the Feds don’t orchestrate a bail-out soon, there’s a good chance markets will crash and government bond yields will plunge. It’s that serious.

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