Fannie and Freddie Waterfalls Are Too Big to Bail

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It's been a wild ride for Fannie and Freddie recently. Yesterday, James Lockhart, director of the Office of Federal Housing Enterprise, said the GSEs are "well capitalized." William Poole, former Fed governor disagrees. See Poole Says "Fannie, Freddie Insolvent."

The market agrees with Poole as share prices have continued to plunge and Fannie Mae Pays Record Yield Spreads on Sale of Two-Year Notes vs. two-year treasuries.

Fannie Mae Waterfall

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Freddie Mac Waterfall

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Institutions Must Be Allowed To Fail

Today Paulson Says Financial Institutions Must Be Allowed To Fail. I would like clarification from Paulson as to what "fail" means. What it should mean is Fannie and Freddie go bankrupt, the government gets out of the GSE sponsorship business, and home prices fall to their natural level.

What I suspect Paulson means is We're All Homeowners Now, Nationalization of Fannie, Freddie Unavoidable. In this scenario, the share price of Fannie and Freddie will drop to zero, yet taxpayers will foot the bill to keep Fannie and Freddie in business.

Wachovia and Washington Mutual at Risk

Yesterday Wachovia Named New CEO and Warned Of Big Loss. Larry Smith, interim CEO said "the company plans to remain independent, despite rumors of a possible takeover." My thought is no one in their right mind would want to acquire Wachovia, and besides, no one is big enough to take them under as JPMorgan did Bear Stearns.

Both Wachovia (WB) and Washington Mutual (WM) are loaded to the gills with Alt-A, liar loan garbage. Wachovia is barely a teenager at $13.13 while Washington Mutual is hanging on for dear life around $5.25 a share.

WMALT 2007-0C1

Chris Puplava has new charts available of the Washington Mutual Alt-A pool WMALT 2007-0C1.That pool has been the "poster child" for what is happening with Alt-A. Although it is just one pool, it is arguably indicative of the rotten nature of liar loans in general.

Pool Stats

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REOs are Soaring

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Tranche List

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The tranche breakdown shows total deal size. Total size is 519.159M, "A" Tranches are 476.069M total, "M" Tranches are 30.112M total, "B" tranches 7.788M total and "C" tranche is 5.19M total.

Cesspool Math

As of today, tranches A1 through A5 are all still rated AAA . Those 5 tranches constitute $476.069M out of an original pool size of 519.159M. In other words, 91.7% of this entire mess is still rated AAA even though REOs are now up to a whopping 10.48% and 60 day delinquencies are 32.69%. Moody's and the S&P should be embarrassed by this.

Too Big To Bail

The credit bubble has popped. Fannie Mae (FNM), Freddie Mac (FRE), Washington Mutual (WM), Wachovia (WB), and Lehman (LEH) are all at serious risk. Many smaller payers are at huge risk as well.

Meanwhile, the Fed continues to orchestrate "takeunders" like the shotgun marriages between JPMorgan (JPM) and Bear Stearns (BSC), and Bank of America (BAC) and Countrywide (CFC). The Fed's idea seems to be for the strong to take over the weak. The reality is the strong become weak through these efforts.

Paulson's statement "Institutions Must Be Allowed To Fail" is in reality an implicit admission the Fed is powerless to stop a credit implosion whether the Fed wants to do something about it or not. We have finally reached the point at which the mess is too big to bail. All that remains at this point is the final numbers on how much taxpayers have to cough up when Congress foolishly tries to make water run uphill.

© 2008 Mike Shedlock

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