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Barney Frank wants to guarantee Fannie & Freddie debt and securities, but only those issued
after Conservatorship. The Dow can rise, but can strength be sustained? Don’t cheer the
February employment picture. Bank Failure Friday!
You Can’t Have a Two-Tiered Guarantee for Fannie & Freddie
Barney Frank wants to “clarify” the Government Backing of Fannie & Freddie under
Conservatorship. He only wants to have issuance since Conservatorship to be backed by the United
States of America. What this means is that debt and mortgages with dated dates prior to September 7,
2008 would not have government backing, while those dated on September 7, 2008 and later would be
backed by the full faith and credit of the US Government.
You cannot have a two-tiered Fannie and Freddie guarantee! I actively traded Fannie Mae and
Freddie Mac debt and mortgage-backed securities off and on throughout my career in the US Capital
Markets since 1972. If Barney gets his way, the market dislocations would be ridiculous. Investors who
bought pre-dated GSE securities and mortgages because of Conservatorship will get screwed as
spreads widen. GSE traders will have to check dated dates when making markets. If this dumb idea is
implemented, mortgage rates will likely spike higher.
I have often pointed to the Fannie Mae website citing that their debt is not US backed under
Conservatorship. Here’s the post as of March 3, 2010 –
Fannie Mae debt securities, together with interest thereon, are not guaranteed by the United
States and do not constitute a debt or obligation of the United States or of any agency or
instrumentality thereof other than Fannie Mae.
Here’s what it states in a CRS Report for Congress dated September 15, 2008 –
On September 7, 2008 the Federal Housing Finance Agency (FHFA) placed Fannie Mae and
Freddie Mac in Conservatorship. This means that the US Taxpayer now stands behind $5 trillion
of GSE debt.
So which is it as you can’t have it both ways? If GSE debt and mortgage securities are government
backed they should be under our nation’s debt ceiling, not off balance sheet. Barney Frank’s idea could
create a cascade of global selling of Fannie Mae and Freddie Mac debt and mortgages, which could
push the Housing Market and Banking System right back on the edge of the Abyss.
Wasn’t it about a month ago when Barney Frank wanted to abolish Fannie and Freddie?
Back in May 2008 on Fox Business I favored the liquidation of Fannie and Freddie months before the
US Treasury took them over in Conservatorship. I suggested beefing up the government-backed Ginnie
Mae mortgage program, while gradually liquidating Fannie and Freddie. Instead US taxpayers are on
the hook for $126 billion and counting and will be covering all losses through 2012, leaving a lifeline
that could be double the current $400 billion.
By expanding the role of Fannie and Freddie the implicit guarantee has become explicit making all GSE
mortgages and debt the obligations of the US government and hence taxpayers. Wall Street and
investors would have been on the hook under liquidation, not taxpayers on Main Street. It was Wall
Street that sold GSE debt and mortgages to global investors stating that they were government-back,
when they were not. Exotic mortgage-backed securities and related derivatives spread around the
world was described and indorsed by Fed Chair Alan Greenspan as the way to spread the risk.
Because of Wall Street Greed US citizens are backing $5.5 trillion in GSE mortgages, and around $1.5
to $2 trillion in GSE debt under Conservatorship. This must be added to the more than $14.2 trillion US
debt ceiling.
The Dow on the rise, but can strength be sustained
The Dow ended last week above my annual pivot at 10,379, so this sets up a test of the January high
of 10,730. The low end of the range was the February low of 9.835. Keep in mind that the NASDAQ
and Russell 2000 set new year-to-date highs on Friday.
The FDIC is having a tougher time finding a bank to take over a failed institution as one was set up as
an FDIC Bridge Bank, and another bank just had its deposits moved to Zions Bancorp.
Three of the four banks had heavy overexposures to C&D and CRE loans with pipeline ratios between
87.9% and 100%, which was the case for the bank within regulatory guidelines for C&D and CRE
exposures.
Send me your comments and questions to Rsuttmeier@Gmail.com. For more information on our
products and services visit www.ValuEngine.com
That’s today’s Four in Four. Have a great day.
Check out the latest Main Street versus Wall Street on Forex TV Live each day at
1:30 PM. The next broadcast is Monday, March 8, 2010.
http://www.forextv.com/Forex/custom/LiveVideo/Player.jsp
Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
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