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  #1  
Old September 10th, 2008, 04:26 PM
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Post Cost of US loans bail-out emerging

HarHar, please comment on this.

Quote:
Cost of US loans bail-out emerging


By Krishna Guha in Washington and Michael Mackenzie and Nicole Bullock in New York
Published: September 9 2008 15:57 | Last updated: September 10 2008 00:34


The US on Tuesday began to face the financial consequences of the bail-out of Fannie Mae and Freddie Mac after Congress’s budget watchdog said the housing giants’ operations should sit on the government’s books and the cost of insuring against a US default crept higher.


With the stock market tumbling, the non-partisan Congressional Budget Office said the government takeover of Fannie and Freddie meant the companies should no longer be regarded as outside the public sector.



Peter Orszag, CBO director, said: “It is the CBO view that Fannie Mae and Freddie Mac should be directly incorporated into the federal budget.”
The Bush administration appeared to be caught by surprise. A spokeswoman for the Office of Management and Budget told the Financial Times: “We are working through this issue with Treasury and other stakeholders.”


The White House could take a different view on Fannie and Freddie and exclude them from its budgets. But this would be difficult because the CBO is regarded as the leading independent authority on US finances and its assessments guide spending decisions by Congress.


The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO, although public accounting rules mean that its tally of US government debt may not necessarily increase by $5,400bn.


The CBO bombshell came as it raised its baseline estimate for the US budget deficit to $407bn this year and a record $438bn next year owing to falling revenues and higher spending, some of it related to the fiscal stimulus.


The price of credit default swaps on five-year US government debt hit a record 18 basis points in early trading, according to CMA Datavision. This means that it costs $18,000 a year to buy insurance on $10m of US government debt.


Tim Backshall, chief strategist at Credit Derivatives Research, said the price implied that the US was more likely to default on its obligations than Japan, Germany, France, Quebec, the Netherlands and several Scandinavian countries. Traders said the CDS market for US debt was illiquid and it was hard to see evidence of increased concern over US creditworthiness in broader market prices.


The price of US government bonds rose and yields fell across the board, as concern over the economic outlook overwhelmed any rise in perceived credit risk. Jay Mueller, senior portfolio manager at Wells Capital Management, said: “We are seeing flight-to-quality buying of Treasuries.”


Both Standard & Poor’s and Moody’s Investors Service said the government takeover of Fannie Mae and Freddie Mac did not affect the US’s triple-A sovereign credit ratings. “It does represent some deterioration in the US balance sheet, but it’s well within what we would call the triple-A space,” said Steven Hess, senior credit officer at Moody’s.


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Old September 10th, 2008, 04:32 PM
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Re: Cost of US loans bail-out emerging

what amazes me is that treasury bureau folks sit in the boards of those financial institutions and monitor them. How they fukk did they allow mortgage cos to give high risk loans to ppl without proper credit and the insurance cos insured them as well.The govt was in the BoD's and allowed this BS.It's a different issue if those guys were not in the board.
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Old September 10th, 2008, 04:42 PM
HarHarMahaDev HarHarMahaDev is offline
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Re: Cost of US loans bail-out emerging

Reposting my views from an article I wrote in July on "some other site"!

US Investment Outlook
I am tired of being bearish. I would like to change the tone/tenor of my posts to be more bullish, but unfortunately, I just can't seem to find any positives in this economy.

"The shareholders of Bear Stearns were ruined, it's true, but Wall Street called the loss a bargain in view of the risks that an insolvent Bear would have presented to the derivatives-laced financial system. To facilitate the rescue of that system, the Fed has sacrificed the quality of its own balance sheet. In June 2007, Treasury securities constituted 92% of the Fed's earning assets. Nowadays, they amount to just 54%. In their place are, among other things, loans to the nation's banks and brokerage firms, the very institutions whose share prices have been in a tailspin. Such lending has risen from no part of the Fed's assets on the eve of the crisis to 22% today. Once upon a time, economists taught that a currency draws its strength from the balance sheet of the central bank that issues it. I expect that this doctrine, which went out with the gold standard, will have its day again."

"For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street's biggest broker-dealers could hardly bear to look themselves in the mirror if they didn't extend themselves three times further. At the end of 2007, Goldman Sachs had $26 of assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34, Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in equity capital per $100 of assets. "Leverage," as the laying-on of debt is known in the trade, is the Hamburger Helper of finance. It makes a little capital go a long way, often much farther than it safely should. Managing balance sheets as highly leveraged as Wall Street's requires a keen eye and superb judgment. The rub is that human beings err."
- James Grant (of the Grant's Interest Rate Observer) in his article "Where's the Outrage?", published in the Wall Street Journal on July 19th, 2008.

Three major events are unfolding in front of us:

- Fannie Mae and Freddie Mac, two dogs that have $12 trillion in mortgage assets, have been 'rescued' by the US Dept of Treasury and the Fed, by providing explicit guarantees on their bonds. Even a die-hard optimist would have to agree that the 'real' market value of these assets would be atleast 10% lower - which is write-offs to the tune of $1.2 trillion. The last time I checked, $1.2 trillion was a lot of money (US GDP is around $6 trillion I believe). The government will have to 'produce' this short-fall.

- FDIC is in the process of bailing out sick banks. At the end of March '08, FDIC reserves were at $52.8 billion to cover $4.43 trillion in insured deposits. Indymac sucked out $30 billion or so (depending upon what they recover from the sale of it's toxic assets), and now two more regional banks collapsed last week. There are plenty more of bank failures to come. Where is the money going to come from to pay back all the depositors? The answer is - monetization. The Fed / US treasury will have to print money and return the deposits.

- Big mega banks and investment companies are in the painful process of deleveraging and re-capitalizing their balance sheets. They are being forced to mark their toxic assets to market. In a recent sale, Merrill Lynch was able to see some of it’s credit default swaps at 22c to $1, which has kindof set a baseline price for other companies. This means that other companies will have to re-appraise their loan portfolios and write-down tons of their toxic debt. In short, it is going to get ugly…very ugly. Several banks and investment companies may have to shut shop. My bets would be on WaMu, Fifth Third, National City, CIT…other major banks like Citi, Wachovia are not safe either. What we had was a preview. The real train wreck is dead ahead. It is quite likely that the US govt will be forced to nationalize these banks.

Basically, absorbing all these losses on to it's balance sheet is going to cost the US Dept of Treasury a lot. It will knock down it's S&P AAA ratings - the pristine credit score enjoyed by the US. That will knock the USD from it's reserve currency status.

How these events would impact the stock market is difficult to predict. However, a few things can be stated with certainty. Inflation to shoot through the roof and the dollar to plummet. Financial companies and leveraged players are going to face a tough time, since they will have to liquidate assets to recapitalize their balance sheets in a highly illiquid market. Discretionary spending will suffer. In fact, even spending on non-discretionary items will come down. Basically, the three entities supporting the economy - consumers, corporations and government - will have to tighten their belts.

There will be a severe economic contraction. The week will get weeded out and the strong will find more room to grow. Speculators will get chewed out and spit out.

- Invest only with non-leveraged cash (don't borrow and invest)
- Make sure that you won't be needing the cash you plan to invest for the next few years, because even good company could get badly knocked down during this 'deleveraging' environment.
- Invest a small portion (10 - 20%) in precious metals (GLD, SLV, CEF). Diversify your currency portfolio, preferably with Japanese Yen (FXY) and Swiss Franc (FXF)
- Pick stocks which have pricing power in a depressed environment. This is where it gets tough. I feel people buying consumer staples (PG, Kroger) may get burned. Although these companies are good and might be able to stay afloat through the crisis, it's unlikely that they would be able to grow their earnings. However, they are still a relatively safe bet.

The market may be oversold in the short term and might rally to 1300-1350, unless there are “black swan” events like a sudden announcement of a bank closure. The fed is unlikely to raise rates, but will increase it's inflation-fighting sabre-rattling. I like medical devices, telecom, pharmaceuticals, healthcare. I am still researching my options. The companies I like so far are:

AT&T (T). At $30.5, it does offer a reasonably good entry point. It has a decent balance sheet and the telecom industry is on the growth path. But play carefully.

CISCO (CSCO): good company, good product line...has been beaten up unfairly, IMO.

DISNEY (DIS)...wait for it to fall a bit..but is good

STARWOOD (HOT): At 32-35, I will be a buyer.

Quest Diagnostics (DGX): Solid company...guided revenue higher..has plenty of good stuff going on. Will benefit if a dem comes to power.

PGP @ anything under $19.5...talk about the baby being thrown along with the bathwater. PGP is PIMCO's StockPlus Income ETF. It invests heavily in S&P futures and Freddie and Fannie Mortgage backed securities. The credit spreads on FNM, FRE MBS and US Treasuries are over 2%, which is crazy considering both are backed by the US govt. It offers a 11.5% yield with a monthly distribution. It doesnt get better than that.

I would buy very selectively and in very small chunks and only unleveraged trades. Remember, we are in a secular bear market. All stock prices are trending lower.
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Old September 11th, 2008, 04:22 PM
HarHarMahaDev HarHarMahaDev is offline
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Re: Cost of US loans bail-out emerging

?? nobody bothered to respond? Itna lamba response diya and nobody responds. Why ask a question then?
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Old September 11th, 2008, 04:36 PM
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Re: Cost of US loans bail-out emerging

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Originally Posted by HarHarMahaDev View Post
?? nobody bothered to respond? Itna lamba response diya and nobody responds. Why ask a question then?
HarHar you are an expert in this topic. I read it all and understood it. What can I ask when I am just beginning to learn? Thanks for the response. Really good.
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