Ratings Delusions Part Deux: Fannie and Freddie Rated Aaa but Traded A2

In economics, cognitive dissonance is an uncomfortable feeling of stress caused by holding two contradictory credit ratings or financial assessments simultaneously: one from a corrupt official source and one from your own common sense and some basic math. (SEE also US trade deficit, Non-farm Payroll Report, Consumer Price Index, and Alan Greenspan)

Fannie, Freddie Downgraded by Derivatives Traders Over Capital
By Shannon D. Harrington and Dawn Kopecki

July 9 (Bloomberg) -- Fannie Mae and Freddie Mac, ranked Aaa by the world's largest credit-rating companies, are being treated by derivatives traders as if they are rated five levels lower.

Credit-default swaps tied to $1.45 trillion of debt sold by the two biggest U.S. mortgage finance companies are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group. The price of contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac and to protect against a default doubled in the past two months.

Traders are overlooking the government's tacit guarantee of the debt as credit losses grow and concern rises that the companies don't have enough capital to weather the biggest housing slump since the Great Depression. (The COMPANIES don't have enough capital to cover it, hell, the FED doesn't have enough money to cover that 1.45 trillion debt - Jesse) Even an implied guarantee isn't enough to convince credit investors that there's little risk to owning Fannie Mae and Freddie Mac debt, said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.

''Investors are viewing even an implicit guarantee from the government as potentially troublesome,'' Backshall said. (Investors! What about the taxpayers? Greenie kept saying that there was NO guarantee. - Jesse)

Worries that Fannie Mae and Freddie Mac may need more capital were heightened this week after Lehman Brothers Holdings Inc. released a report saying a new accounting rule may require them to raise $75 billion. Freddie Mac dropped 18 percent June 7 in New York Stock Exchange composite trading and Fannie Mae dropped 16 percent.

The companies' congressional charters provide exemption from state and local corporate income taxes and give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default. Fannie Mae spokesman Brian Faith and Freddie Mac spokesman Michael Cosgrove declined to comment.

Gap Widens

Credit-default swaps tied to Washington-based Fannie Mae's senior debt climbed 39 basis points to 74 basis points since May 1, while contracts on McLean, Virginia-based Freddie Mac's senior debt increased 40 basis points to 75, according to London-based CMA Datavision. A basis point is 0.01 percentage point.

The cost to protect the companies' subordinated debt from default has risen at a faster rate amid concern the government may not honor the subordinated debt, Backshall said. The subordinated debt of both companies is rated Aa2 by Moody's because the owners would be paid after the senior bond investors.

Credit-default swaps tied to Fannie Mae's subordinated debt have jumped 108 basis points to 195 basis points since May 1. Contracts on Freddie Mac's subordinated debt have risen 105 basis points to 193 basis points.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Combined Losses

Fannie Mae and Freddie Mac, which reported combined losses of more than $11 billion, have raised more than $20 billion since December. Merrill Lynch & Co. analyst Kenneth Bruce said in a report yesterday the ''highly levered financial institutions'' will have pretax credit-related losses of $45 billion.

''Fannie and Freddie are going to have to raise more capital and nobody thinks they're going to be able to raise capital when they need to,'' said Paul Miller, an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Virginia. ''It's going to be very expensive.'' (When you're a congressman all your problems look like taxpayers. - Jesse)

Recouping Losses

Fannie Mae rose 12 percent and Freddie Mac gained 13 percent yesterday, recouping some losses from a day earlier, after the companies' regulator said they were adequately capitalized and Treasury Secretary Henry Paulson said they can still be a ''constructive force,'' in the economy.

The companies own or guarantee about 46 percent of the $12 trillion U.S. mortgage market. (We are so fucked. - Jesse)

''It concerns me that people sort of extrapolate well beyond what the facts are,'' James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, said in an interview with Bloomberg Television yesterday.

The government is leaning on the companies to help revive the mortgage market. Congress lifted growth restrictions on the companies, eased their capital requirements and allowed them to buy bigger, so-called jumbo mortgages to spur demand for home loans as competitors fled the market. (What do they call that, the 'hair of the dog that bit you?' - Jesse)

Their share of new conforming mortgages, or loans of $417,000 or less, almost doubled to 81 percent in the first quarter, Ofheo said.

The bailout of Bear Stearns Cos. arranged by the Federal Reserve in March shows the government won't allow the companies to fail, Robert Millikan, who manages $5 billion as director of fixed income at BB&T Asset Management in Raleigh, North Carolina.

''We're looking at it from a standpoint of, if the Fed is not going to allow a problem with Bear Stearns, they're certainly not going to allow a problem with Fannie and Freddie,'' Millikan said. ''With all the exposure that banks have to Fannie and Freddie, the ripple effect through the whole financial system would be unbelievable if they were allowed to fail,'' he said. (Dude, the NY Fed couldn't stand up to a default by Fannie and Freddie - Jesse)

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Major US Stock Indices Deflated by Gold: the Cruel Deception

Our hypothesis is that after the tech bubble collapse of 2000-2002 and the economic shock of 911, the Fed began a concerted effort to inflate the currency through an unprecedented period of negative interest rates. The result of this has been a brief return to the 2000 highs in most stocks last year except of course the techs, and a substantial bubble in debt and credit derivatives that threatens to overturn the US banking system.

Here we present a few of the US stock indices as deflated by gold, showing their true performance in 'real value' terms discounting the Fed's monetary inflation. A number of commodities could have been used the same way as deflators of financial assets, among them some of the base metals, silver, and oil.

The Fed can create only paper. Inflation does not create value, it merely masks the rot of economic stagnation, but can do so for several years if the inflation can be concealed artfully. The US has been struggling through a particularly non-productive period for most Americans in terms of real wealth production especially as expressed in the growth of savings, which has been decidedly negative.

In their irresponsible foolishness and greed the Fed and the Bush Administration have managed to transfer more wealth from the many to the few, further impeding any sustained recovery since the health of the economic body has been concetrated in a few parts of questionable productive value.

This is how we coined the term "Potemkin Economy" many years ago. It is a cruel illusion of the Fed, the Treasury, and their associates in misdirection and deception. For that is what this has been, regardless of motives or intentions. It is a disgraceful espisode in our country's history, but this is what happens when one gives themselves over to the rule of fear and greed.


Here is the Dow Industrial Average, deflated by gold. It is also known as the "Dow-Gold Ratio." Long run the ratio tends to return to 2. It seems to be well on its way.



SP 500


Russell 2000

US Stocks Rally on a Decline in OIl Prices and the Fed's Extension of Credit Facilities

Crude Oil prices declined today and the US equity markets rallied hard in the final hours as the shorts were covering and the bulls took the opportunity to buy on a spark of optimism in these deeply short term oversold markets.

Alcoa reports after the bell that it beat Earning Per Share by a penny and also exceeded revenues on estimates that have been greatly lowered. Mohawk Industries warned and was spanked after hours. VMWare is weighing on the tech sector.

We'll have to see if this is just another short covering bounce or something more profound. Follow through to the upside tomorrow to take the SP back into the 1290's is required for a firmer indication of any trend change.



Follow through in the decline of oil prices is necessary. So far its just a correction in an obvious bull market.

IndyMac to Halt Most of Its Mortgage Business and Lay Off 53 Percent of Employees

IndyMac to stop most mortgage loans and cut 3,800 jobs
By Jonathan Stempel
Monday July 7, 5:47 pm ET

NEW YORK (Reuters) - IndyMac Bancorp Inc (NYSE:IMB), one of the largest U.S. mortgage lenders, said on Monday it will eliminate 3,800 jobs and stop making most home loans after regulators concluded it was no longer "well-capitalized."

In a letter to shareholders and employees, Chief Executive Michael Perry said Pasadena, California-based IndyMac will stop accepting most applications and locking rates on retail and wholesale mortgages. IndyMac plans to honor existing rate-locked loan commitments.

The job cuts will affect 53 percent of IndyMac's 7,200 person work force and be made in the next couple of months, reducing operating expenses by 60 percent, Perry said. They are in addition to about 2,700 cuts already made this year.

Perry said regulators have directed IndyMac to follow a new business plan designed to bolster capital, but the company does not expect to raise capital "until there is more stability and less uncertainty in the housing and mortgage markets."

IndyMac plans to focus on its mortgage servicing unit, its 33-branch southern California thrift with $18 billion of deposits and its Financial Freedom reverse mortgage unit.

The company made $77 billion of mortgage loans in 2007, ranking ninth nationwide, according to the Inside Mortgage Finance newsletter.

In addition, IndyMac expects its second-quarter loss to be larger than the $184.2 million, or $2.27 per share, it lost in the first quarter. Analysts on average expected a quarterly loss of 96 cents per share, according to Reuters Estimates. IndyMac lost $896 million in the nine months ending March 31.

"It shows the environment for mortgage lending remains extraordinarily challenged," said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, New Jersey mortgage information publisher. "IndyMac had been a well- regarded player in mortgages, but given how the market is, it may be easier to restart such a business in the future than maintain one now."

Perry also said he asked IndyMac's board to reduce his base salary by 50 percent. His annual salary is capped at $1 million, a regulatory filing shows. Perry was unavailable for comment, spokesman Grove Nichols said.

IndyMac is the largest independent, publicly-traded U.S. mortgage company, following last week's roughly $2.5 billion purchase of Countrywide Financial Corp by Bank of America Corp (NYSE:BAC - News). It joins more than 100 mortgage companies to curtail lending or go bankrupt since the start of 2007.

CAUGHT UP IN MORTGAGE BOOM

IndyMac long specialized in making "Alt-A" home loans, which fall between prime and subprime in quality and which typically go to borrowers who cannot verify income or assets.

While IndyMac typically sold many loans it made, it was hit hard as mounting delinquencies and defaults caused the market for most nontraditional home loans to disappear.

IndyMac in the second half of 2007 refocused on making smaller, safer loans that it could sell to government-sponsored enterprises Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE ).

The changes, however, came too late. IndyMac said its ratio of nonperforming assets to total assets increased sixfold to 6.51 percent in the year ending March 31, as its mortgage industry market share fell to 1.7 percent from 4.08 percent.

A June 30 report by the nonprofit Center for Responsible Lending said IndyMac, like many rivals, got caught up in "the overheated atmosphere of the mortgage boom" by making too many unsuitable loans in the quest for short-term profit.

On June 27 and 28, IndyMac said it suffered a mini bank run as customers withdrew about $100 million of deposits.

The withdrawals came after Sen. Charles Schumer, a New York Democrat who chairs the Joint Economic Committee, wrote to banking regulators that IndyMac could fail. IndyMac said on June 30 that Schumer's concerns created the "wrong impression."

Reverse mortgages let people, mainly 62 years and up, borrow against equity in their homes. Advances are not taxable, and loans typically need not be repaid during homeowners' lifetimes.

IndyMac Letter to Shareholders