Fannie
Mae's Board Briefed on Troubles See: Article Link EDITOR'S COMMENTS by Ole Bear At one time prior to 2000, Berkeshire Hathaway, the investment vehicle run by Charlie Munger and Warren Buffett up in Omaha, Nebraska had a great deal of their chump change in the GSEs. From what we remember, they dumped all of their GSE portfolio in 1999 much to the surprise of the Darlings of Wall Street, saying this stuff was too risky for their portfolio. We agree. Most folks who have their cash on Wall Street stashed in a so-called money market fund, since they don't want to be active in stocks right now, ought to look again as to what is really in that money market account. Just because it is a money market account, dudn't mean it is all in US Treasuries, Pal! 6 out of 10 Wall Street money market investment accounts have a good deal [generally 40% or more] diverted to GSE portfolio investments -- which is way too much risk for my blood. NAVs of these GSE money markets could go below $1! We suspect the accountants need to look at Fannie Mae's actual loan loss reserves for starters, and follow the money on how much they have actually been losing on their foreclosures due to mortgage and appraisal fraud, i.e., the trumped up loans on inflated property values. From what we see here in Missouri, they've been losing money on these foreclosures -- hopefully the loan loss reserves of the local Missouri lenders are covering Fannie Mae's assets. Munger and Buffett indicated little over a year ago that comparing derivatives to sewage was an "insult to sewage." We agree. A good deal of the GSE book of business is playing the derivatives game on interest rates, credit sways, and the green cheese in the Moon for all I know. These counter-parties have the propensity to make the blowup of Long Term Capital Management look like a picnic on the 4th of July! When you get right down to it, the GSEs don't have any real cash to protect the taxpayers in the game of bailout. The FED knows it, and already has the vehicle in place to bail these rascals out as the 'lender of last resort.' Betcha didn't know that -- Congress will never have to "vote on it!" As John Dizard sees it in Alarm Bells Sound for Fannie and Freddie the Federal Reserve won't actually be bailing out the GSEs -- Mr Greenspan and Mr Mankiw don't think they'll have to bail out Fannie and Freddie. They think they'll have to bail out the half dozen largest swaps and derivatives dealers who are the big banks and investment dealers. In a rapidly rising interest rate environment, the "gamma", or the rate of the rate of increase in their hedging of their obligations to the GSEs, could, or, if you believe the chairman, will, require the Fed to act as the derivatives counterparty of last resort. The math tells him this could be seriously inflationary. In our view, this is one financial cesspool. Author Dizard's essay linked above, is obvious Realty Reality Recommended Reading, Gang! The mechanism for the Name of the Game is Bailout -- is already in place, Pal! Joe and Jane Six-Pack may not be able to afford that next McTeer SUV as a result -- and their kids may have to work through college just like their grandparents had to? Ole Bear Editor © 2004 Realty Reality |
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