Monday, September 8, 2008


No it was not like a stroke or a heart attack. It was a seizure. Formally a move to conservatorship but a step short of receivership. Got it?

What it did was put the government in full control of the Mac/Maes. Cut off the political lobbying as some had tried to have done a while ago. Stopped dividend payment. Trashed stock values. Elevated bond holders to sainthood... and stuff like that.

As for the impact on the economy it will boost GDP growth to 4%. Stop inflation. Put a chicken - nay a NY strip steak - in every pot (unless you are a vegetarian and would prefer a carrot). it will cure cancer. Transacting with the new entities also will take years off your life- they will be renamed PDL: Ponce De Leon. Or maybe Ponzie-dazed-by-leverage.

Well OK, so I exaggerate... But based on the market reaction on Monday who would know those were not the expectations?

Following a spurt of the unemployment rate to 6.1% from 5.7% on Friday no wonder housing and building material stocks soared.WEAK HOUSING, after all, BUILDS CHARACTER! This was an AMERICAN reaction.

Or maybe not.

It was an overreaction to what Treasury did. Treasury 's actions will help to end or mute the credit crunch. By pumping more funding in the Mac/Maes it will be easier for those who should get mortgage funding to get it. But there is nothing here about lowering the hurdle rate for subprimers. A credit crunch occurs when qualified borrowers can't get loans. So that is the part of the economy that is most clearly fixed.

Still subprimers are really no better off. Housing is still troubled. Banks will participate in mortgage provision as long as they can sell to to Fannie or Freddie, so they must be qualifying loans. While housing shows some signs of more stable activity, prices are still falling. Moreover, if the economy is weakening you can forget about stabilizing housing soon. And that was the clear threat of Friday's employment report that was totally forgotten by Monday.

And that is why I lampoon the stock rally on Monday! What do stocks do for an encore of Tuesday? Sell back off? 'Remember the Main!' or the Main report on Friday anyway.

Clearly there was a lot of angst and fear about the GSEs. The stock market reaction tells you that much. There were fears that foreigners would sell agency securities. Foreigners were starting to think that the full faith and credit promise might not get kept. Well, it was kept. And because it was a promise, that act was not moral hazard. It was instead STUPID - a really stupid promise! Why did anyone think it a good idea to give credit lines from the government to private for-profit firms and to back their debt with a full faith and credit promise? Wish the government could do that for me. Of course, it led to over leverage. Government did not oversee the obvious risk, until it was far too overdone. With privilege must go regulation. This is a general lesson we are still learning.

So now building up the Mac/Maes is part of the prop up for the economy. It couples with a plan to cut them down by about two thirds after they have become really bloated. That's how I like to lose weight. My plan is to add 20lbs then shed forty. Don't ask how.

Good plan.

No wonder everyone likes it. It is real. It incorporates denial. has a destination and is light on strategy.

I think we got more specifics about their policy intent from the candidates' speeches at their conventions than from the Treasury in its announcement. So just close your eyes and buy your stocks. Forget about last Friday. Heck unemployed people have to live somewhere, too! If it's the wrong thing to do you will hear the screaming and can sell.

Keep your ears open.

By the way this sort of excessive GSE balance sheet bloating thing is now officially illegal. I was watching the Packer-Viking game and toward the end, the officials threw a flag against the Packers for leverage. Leverage is now so bad its a penalty in football.



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