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The ground is shaking. The buildings are swaying. Now, you have to wonder how many of them will come tumbling down.
I’m talking about the major financial institutions in this country.
The tremors in the mortgage market that first started rumbling a year ago have escalated. And now they’re ripping through the industry with the force of a 9.0 earthquake …
It’s no longer just mortgages that are shaking the biggest banks, brokers, and insurance firms. Auto loans, credit cards, commercial real estate, credit derivatives, and construction and development loans are setting off their own temblors.
Still …
Fannie Mae and Freddie Mac
Are the Epicenter of this Crisis
By far, the biggest problem out there right now is the government sponsored enterprises, or GSEs. For a while, Fannie Mae and Freddie Mac have been under pressure thanks to concerns about their derivatives exposure, losses on their portfolios of loans and mortgage securities, and the collapse of the mortgage insurance firms they rely on to help support their businesses.
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But now those rumblings are getting much larger — and much too big for Wall Street to ignore. The problem is capital. Fannie Mae and Freddie Mac don’t have enough of it. They need to sell more shares, more preferred stock, more debt, or some combination to shore up their balance sheets.
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| Freddie Mac’s shares have plunged back to levels not seen since the early 1990s! |
Unfortunately, investors are no longer in a giving mood. They threw tens of billions of dollars at several different financial firms in late 2007 and early 2008 — including $20 billion for Fannie and Freddie — only to watch the value of those investments plunge. So now any firm that wants to raise capital has to pay through the nose for it … if it can get the money at all.
The credit concerns are growing by the day. Just look:
- In a debt sale this week, Fannie Mae had to cough up the largest amount of additional yield versus Treasury securities ever. That’s a sign bondholders are increasingly worried about the credit quality of the two GSEs.
- And the credit default swap market, where investors buy and sell contracts designed to protect bondholders against the possibility a company will default on its obligations, is also pricing in more risk at Fannie and Freddie.
- Things are getting so shaky that the government is reportedly preparing contingency plans in case one or both GSEs continue to roll over. The Wall Street Journal said yesterday that ideas include the Federal Reserve offering Fannie and Freddie a credit line, or the government taking an equity stake in the companies.
All of this puts last year’s ridiculous government assertions that the problems were “contained” in an even harsher light. Fortunately, as a Money and Markets reader, you were well-prepared — far in advance — for the devastating headlines we’re seeing now.
Good thing because …
The List of Credit Casualties
Is Getting MUCH Longer!
It’s not just Fannie and Freddie that are in big trouble …
- Marshall & Ilsley, a midsized bank based in Wisconsin, just announced it would have to set aside $900 million in the second quarter to cover losses on housing and construction loans. That was 35 TIMES the loan loss provision a year earlier.
- Triad Guaranty, one of the leading mortgage insurers, was just forced to stop writing new policies due to the losses it’s been suffering on mortgage policies. Its shares have fallen from $58 not too long ago to less than a buck now.
- Or how about Merrill Lynch? The company lost $2.2 billion in the third quarter of last year … $9.8 billion in the fourth quarter … and ANOTHER $1.9 billion in the first quarter of this year. And it’s on track to lose billions more going forward, forcing the company to consider selling off assets to raise capital.
Suffice it to say, there is no way to ignore this problem any longer. It’s here. It’s growing larger by the day. And you simply have to take steps to protect yourself. That includes raising cash to ride out this crisis … hedging with inverse Exchange Traded Funds or mutual funds … and avoiding financial stocks like the plague.
If you haven’t already heeded the multiple warnings I’ve issued in the past two years on lenders, banks, brokers, builders, and other vulnerable firms, then what the heck are you waiting for? Just like you would when any earthquake strikes, this is the time to hunker down, and not leave yourself in harm’s way. Take action before it’s too late!
Until next time,
Mike
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