"In the Incarnation the whole human race recovers the dignity of the image of God. Thereafter, any attack, even on the least of men, is an attack on Christ, who took on the form of man, and in his own Person restored the image of God in all. Through our relationship with the Incarnation, we recover our true humanity, and at the same time are delivered from that perverse individualism which is the consequence of sin, and recover our solidarity with all mankind."
Dietrich Bonhoeffer
They say one picture is worth a thousand words (and a big thanks to TheContraryInvestor for the chart. His weekly reports are invaluable.)
Here is why the slumping airlines do not affect the Dow Transports Index significantly.
We do not understand the rationale, but we were quite surprised to see how little they contribute to it.
The Banks have always disliked Fannie and Freddie, in the way that rival criminal crews are sometimes in conflict, sometimes cooperating in an uneasy truce. Greenspan, as the voice of Banking, always sought to limit Fannie and Freddie even while he was urging wild abandon with just about every other form of credit and regulatory restraint, from hedge funds to credit derivatives to Glass-Steagall.
Allowing the Fed a greater role in regulation is a major policy mistake by almost any measure. They are private, they are opaque, they are controlled by special interests, they are not answerable to the people except on occasional visits to the relatively clueless Congress.
Fannie, Freddie `Insolvent' After Losses, Poole Says
By Dawn Kopecki
Bloomberg
July 10 (Bloomberg) -- Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.
Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.
Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said.
``Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,'' Poole, 71, who left the Fed in March, said in the interview yesterday.
Fair value accounting measures a company's net worth if it had to liquidate all of its assets to repay liabilities. Fannie Mae and Freddie Mac, both of whom have the implicit backing of the government, make money by borrowing in the bond market and reinvesting the proceeds in higher-yielding mortgages and securities backed by home loans.
`Inflection' Point
Lawmakers in Washington may question Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson at a 10 a.m. hearing today about the financial health of the companies and whether they jeopardize the financial system. (This will be interesting to watch, to see how these jokers spin this - Jesse)
``At some point we're going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves,'' Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television. ``We're getting to that point where a decision has to be made by Washington.''
The plunge in Fannie Mae and Freddie Mac yesterday in New York Stock Exchange trading led financial shares to their biggest decline in six years and sent the Standard & Poor's 500 Index into its first bear market since 2002. Fannie Mae, which dropped $2.31 yesterday, rose 41 cents to $15.72 in Frankfurt trading today. Freddie Mac, which declined $3.20 yesterday, rose 24 cents to $10.31 as of 9:25 a.m.
`Well-Capitalized'
The government is counting on Fannie Mae and Freddie Mac, which own or guarantee about half the $12 trillion in home loans outstanding, to help revive the housing market. Congress lifted growth restrictions on the companies, eased their capital requirements and allowed them to buy bigger ``jumbo mortgages'' to spur demand for home loans as competitors fled the market.
Paulson said on July 8 he was pleased with Fannie Mae and Freddie Mac's efforts to raise capital. Bernanke said the same day the firms need to be ``strong, well-regulated, well- capitalized'' to provide credit ``without posing undue risks to the financial system or taxpayer.''
The Treasury has been discussing what to do if Fannie Mae and Freddie Mac fail for months as part of its contingency planning, the Wall Street Journal reported today, citing three people familiar with the matter. The government doesn't expect the companies to fail and it doesn't have a rescue plan in place, the Journal said.
`Long-Time Critic'
``We are managing our business and maintaining a capital position that will allow us to fulfill our congressionally chartered mission now and in the future,'' Brian Faith, a spokesman for Fannie Mae, said.
Poole is ``a long-time critic,'' said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac.
``Freddie Mac is doing exactly what Congress intended when it chartered the company and, more recently, when it passed the Economic Stimulus Act,'' McHale said. ``We are well capitalized and positioned to continue to serve our vital housing mission.''
While leading the St. Louis Fed, Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and said the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters.
Government Ties
Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote home buying in the U.S. The companies' charters give the Treasury the authority to buy as much as $2.25 billion in each of their securities in the event of possible default.
The government will likely be forced to take over the companies because of the mortgage meltdown, Poole said. (The monetization of that debt should provide a nice kick to the inflation already underway - Jesse)
``We know in a crisis the Federal Reserve tap would be open,'' said Poole, now a senior fellow at the Cato Institute.
The bailout of Bear Stearns Cos. by JPMorgan Chase & Co., arranged by the Fed, demonstrates the government's unwillingness to allow ``large, systemically important'' financial institutions to fail, he said. Bear Stearns collapsed after customers fled amid speculation the company faced a cash shortage.
``I worry about those institutions,'' retired Richmond Fed President Alfred Broaddus said. ``They are huge. They dwarf the Bear Stearns issue. In the very worst case scenario, I don't know how you do it other than extend money and the public takes the loss.''
$20 Billion Raised
Fannie Mae and Freddie Mac have raised a combined $20 billion since December to cover losses of more than $11 billion generated since the credit crisis began last year. Freddie Mac has yet to raise a planned $5.5 billion, scheduled for mid-year.
The companies have access to the Fed's so-called Fedwire payments system allowing them to access funding if needed, said Vincent Reinhart, the Fed's chief monetary-policy strategist from 2001 until September 2007.
They can withstand the slump in part because most of their investments are mortgages made before 2006 when lending standards were tighter, making them less likely to default, said Eileen Fahey, a Chicago-based analyst at Fitch Ratings.
``We do not believe they are technically insolvent,'' Fahey said. ``People seem to lose sight of the fact that a majority of the mortgages that they are holding and are guaranteeing were originated pre-2006.''
Default Swaps
Comments by the companies' regulator this week that they are adequately capitalized also eased concern, said Lawrence Yun, chief economist of the National Association of Realtors in Washington. The companies have about $80 billion of regulatory capital supporting $5.2 trillion of mortgages.
``Just given the size of the two companies, surely the government would not stand aside'' and let them fail, Yun said.
Fannie Mae sold $3 billion of two-year notes yesterday to yield 74 basis points more than Treasuries. A basis point is 0.01 percentage point. That's the widest spread since Fannie Mae first sold two-year notes in 2000 and triple what it paid in June 2006.
The price of credit-default swaps, contracts used to speculate on the creditworthiness of Fannie Mae and Freddie Mac, doubled in the past two months to more than 80 basis points for the senior debt, according to London-based CMA Datavision.
The median credit-default swap on debt rated Aaa by Moody's was 26 basis points as of July 8, data from the credit rating firm's strategy group show. It was 76 basis points for debt rated A2.
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 pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower 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.
To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net.
Last Updated: July 10, 2008 04:15 EDT
Another bounce back up to retest that neckline will not be surprising. If it fails again the bulls may be in real trouble.
Fitch says may cut Merrill Lynch debt rating
Wed Jul 9, 2008
12:22pm EDT
NEW YORK, July 9 (Reuters) - Fitch Ratings said on Wednesday it may cut Merrill Lynch & Co Inc's debt rating due to expected ongoing write-downs and diminished prospects for earnings.
Merrill's rating was the only one placed on review for downgrade as Fitch completed its evaluation of investment banks, affirming the ratings of Lehman Brothers, Goldman Sachs, and Morgan Stanley.
Fitch now rates Merrill "A-plus," the fifth-highest investment grade and the same as Lehman's rating, while Goldman Sachs and Morgan Stanley are rated one notch higher at "AA-minus."
Fitch said Merrill's exposure to mortgage-backed debt and downgraded bond insurers at the end of the first quarter was significant relative to its peers and expressed concerns about the level of the brokerage's long-term debt maturing over the next 12 months.
The rating firm said it expects the No. 3 Wall Street investment bank to report a fourth consecutive quarterly loss on July 17. It cited losses in fixed income, currency and commodities operations, which may "overwhelm" income from the better-performing retail brokerage, private client and equities businesses.
Just like its rivals, Merrill faces declining investment banking business opportunities due to the current negative credit environment, Fitch added.
"These reduced revenue opportunities, coupled with Merrill's ongoing negative mark-to-market adjustments, significantly constrain the company's earnings prospects," Fitch said in a statement.
The world's largest brokerage has recorded more than $30 billion of write-downs since the third quarter of last year and Wall Street analysts forecast up to $6 billion of additional charges in the second quarter.
To offset those write-downs, Merrill Chief Executive John Thain is widely expected to raise capital by selling assets, which could include the company's stakes in BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz) and Bloomberg LP. For details, click on [ID:nN09380419]
Fitch said monetizing these assets could generate "incremental capital," adding that current market conditions also limit attractive sales opportunities for other assets.
Although Merrill has over $80 billion in excess liquidity at the parent company level to cover unanticipated cash needs and has broad access to retail and institutional investors, Fitch expressed concerns about its funding profile. Merrill faces $73 billion of long-term debt maturing over the next 12 months, according to Fitch.
"Fitch believes the investor base may be becoming saturated and financial flexibility may be more limited in the future. Satisfying additional capital needs with more equity or unsecured term debt may prove costly," the rating firm said.
Fitch said the rating outlook on Lehman and Morgan Stanley is negative, while Goldman's is stable. The outlook indicates the likely direction of the rating in one to two years.
Reporting by Anastasija Johnson, Editing by Dan Grebler
