The Freddie - Frannie Story

Freddie - Frannie Story

Last Friday FRE and FNM crashed 40% each. Immediately on Sunday Fed has come up with a rescue plan to bail out these big brothers with Capital Injection.

It’s a tragic Death of Capitalism in America… now ppl need Communism to live in US.

Lessons learnt:

• Charminar Bank is no different from Freddie Mac - It doesn’t matter where we invest / save the money – It finds its own way out.
  
• 2008 Freddie Mac / Fannie Mae are 2015 ICICI Bank and HDFC - Wait for an Indian Housing Market collapse and don’t expect Govt to Bail out with a rescue plan.
  
• Power is getting discharged slowly and US may not stay as a super power for very long – Get rid of the Green Pasture fever and stop acting like an American by going to Mc Donalds.
  

Moral of the Story:
Irrespective of Economy / War, Government stays – Join Chiru’s Political party and beat the wave.


Consumer confidence is at an all time low now. This is one kind of a time where in trusting a 3rd person [Bank] and depositing money is like gambling.
If Investment Banks are making losses, where do people Invest / Save their money..??

Answer is Gold. Open a locker, buy Coins of Pure Gold and put them there. That way you are not giving ur money to anyone. Even if Bank closes down, you can take ur property back.

Also keep doing short term partial risk investments. Bcoz Americans are not lazy to sit on their asses and watch the Economy fall, they will come up with new Financial Instruments and some robust laws / derivatives to make more money. Keep following the news and look for directions and indicators. One such indicator is Energy stocks.

Look at the chart of this company:

CSIQ went up by 18% yesterday bcoz they raised their Earnings estimates for the coming quarter. Read the news next to the chart.

http://finance.google.co.uk/finance?client=ob&q=NASDAQ:CSIQ



Fannie, Freddie Crisis

Fannie Mae and Freddie Mac? Heard of them? Sounds like some burger? Well, these are the two names which are now looming large over an impending financial crisis in USA. These are the two names why the US and the Asian markets have been down. Maybe two years ago, we in India, would have never ever thought of getting into such micro economics of USA. But after the sub prime crisis, to which India was insulated to a large extent, yet had to bear the indirect consequences, anything which even smells of a scandal or a financial crisis in USA, sends around warning bells.

So what exactly are Fannie and Freddie? Well, they are two of the largest and the oldest US mortgage companies; they finance most of the home loans being made in America. Sub prime loans are not within their purview as they are legally not allowed to do so. Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income. Together, the two companies touch more than half of USA’s $12 trillion mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds.

Fannie and Freddie are private companies with stockholders and profits, but yet, they hold the status of being "government-sponsored enterprises" established by federal law. This means that they are like some quasi Govt organization but with special privileges. The special privilege means that when in trouble, the US Fed would come to bail it out, meaning the tax payers would pick up the tab. This means, that when the companies make profits, the shareholders have a jolly good time but when in trouble, shareholders continue to make merry as they know that they will be pulled out by the taxpayers.

What then is the crisis right now? These two companies have been hit hard by the mortgage foreclosure crisis. Last Thursday, both the stocks were battered down to new lows after a former central banker made comments that the companies might not be solvent. There is news that the losses suffered by these two companies would now be much larger than the $11 billion they are already reported to have lost. The impending crisis is that foreclosures are growing, borrowing costs are going up and housing prices are declining. Given these facts, there is growing concern that Fannie and Freddie would soon start defaulting on their debt. And if the problems of these two companies are not resolved soon, it would hit large companies across the globe as securities of these two are held by large overseas financial institutions, central banks and investors.

Asia is one of the largest holders of both Fannie and Freddie debt, outside the U.S., so the implications are huge. Taiwan's largest financial companies said they hold more than US$11.5 billion in securities linked to Fannie and Freddie. Japan's three biggest lenders held a total of US$44 billion in debt securities issued by U.S. government- backed mortgage finance companies including Fannie and Freddie.

The general perception is that this would not be allowed to break out into a major crisis, wherein the US Govt would step up rescue efforts. Yet there is concern about getting some sort of confirmation on the probable steps the Treasury department would take for the bail out. Some also feel that even if the U.S. government works out a rescue plan, no quick resolutions are expected to follow. And it is this uncertainty which has spread panic.

The biggest question – will Freddie and Fannie take down the US economy? After the rescue of Bear Stearns and JP Morgan in March, this rescue plan for Fannie and Freddie seems larger as it affects economies across the world and more than half of the American population. But with the Govt backing the companies, there is no danger of it collapsing. Fannie and Freddie are a part of American history and culture now, and the Bush administration cannot afford to have one more failure on its report card, especially with elections scheduled in November. With the collapse of the sub-prime crisis and given the state of the US housing market, there is no alternate but to rescue Fannie and Freddie. Yet, there is no denying that there does exist a major financial crisis in USA and the going would get only tougher for the tax payers.

Would this have an effect on the Indian markets? Market is all about sentiments. So when the moods are jittery across the world markets, can Indian markets stand aloof? Though the sub prime crisis did not cause a collapse of our banking system, it did affect the sentiments. And with FIIs now being a big part of the Indian investing fraternity, surely, there would be some more downward effect of Fannie and Freddie if the issue is not resolved soon.