Via Cryptogon / Sydney Morning Herald:

IN A modern financial system nothing is more frightening than a run on the bank. The US has now suffered a series of them, and they are escalating in size and scope, posing a serious threat to an already reeling economy.

Rumours swamped financial markets on Friday that the US Government would be forced to step in to aid the mortgage finance giants Fannie Mae and Freddie Mac, which together own or guarantee $US5 trillion ($5.16 trillion) in US home loans.

In Wall Street’s version of a run on the bank, investors drove Fannie Mae and Freddie Mac shares to 17-year lows, signalling a gnawing lack of faith in the companies’ ability to survive rising mortgage defaults without the Government’s help.

Later on Friday regulators took over IndyMac Bank of Pasadena, saying the $US32 billion lender had collapsed under the weight of bad home loans and withdrawals by spooked depositors. It was the second-largest bank to fail in US history.

Friday’s events were felt around the world, knocking the battered US dollar lower and driving up interest rates.

“This is a flare-up in the financial forest fire that is far beyond anything we’ve seen before,” said Christopher Low, chief economist at the investment firm FTN Financial in New York.

It is triggering worries that would have been unthinkable even a year ago, including that the US Treasury’s debt might lose its AAA credit grade because of heavy blows to the nation’s fiscal health from the housing mess.

…

In 2002 weary investors were hit by a wave of corporate accounting scandals. They simply felt they could not trust what many companies were telling them about their sales or earnings. Share prices dived further.

This time the crisis of confidence is in the US banking system. Fearing more severe losses than they have already suffered, investors in recent weeks have fled stocks of some of the US’s biggest financial institutions at a pace that has stunned Wall Street. Last week they turned with a vengeance on Fannie Mae and Freddie Mac.

Despite the companies’ assurances that they had adequate capital cushions against surging defaults on the mortgages they own or guarantee, the market does not believe them.

For the Government that poses a quandary. Because of their size and importance to the mortgage market, it is inconceivable that Fannie Mae and Freddie Mac would be allowed to fail. But an outright takeover of the companies by the Government, as some experts have suggested, could frighten foreign investors - who are big lenders to the Treasury - by in effect adding the companies’ $US5 trillion debt load to the Treasury’s already substantial debt.

Nationalising the companies “would put the full faith and credit of the Treasury at risk”, said Allen Sinai at Decision Economics in New York.

“It would make foreign investors think hard about buying US Treasury debt.”

The way you stop a bank run is to restore confidence. For the US, the challenge is not just to restore confidence among Americans, but to make sure it does not evaporate among foreign creditors.

Via Cryptogon

WARNING: This is not a recommendation to buy, sell or hold any financial instrument.

The firms that make the mortgage industry possible in the U.S. are about to be taken onto the books of the U.S. Government.

I don’t know of any clearer way of summing it up.

In all of my years of observing the farce of “the free market” in the U.S., it has never appeared more absurd than it does right now. This news is remarkable, even to someone as short the U.S. Dollar as me. This is take-your-breath-away kind of news.

Are they using the term “unlimited” because that somehow sounds better than $5.3 trillion, or is there something else we don’t know about yet? The U.S. taxpayer and dollar holders are essentially going to eat the real estate crisis.

The advice I used to give was: Get your ass, your family and your money out of the U.S. It’s probably too late for that. Dig in. Shelter in place. Brace for impact, etc.

I would not assume that banking situation will continue to unwind in an orderly manner.

If the herd begins to smell trouble, it will move with astonishing speed and ferocity. Don’t get caught trying to move your money to the exit as millions of zombies attempt to do the same thing.

—

The Asian Forex session is underway and I’m trying to understand how the dollar hasn’t crashed through the remaining supports on this almost unbelievable news.

My best guess is that, rather than the system crashing to a halt, which it would have, this intervention has introduced yet another short reprieve and the dilutive effects of this aren’t baked into the dollar yet. Again, that’s just a guess. I’ll be relying on the chicken entrails and squiggly lines (technical analysis) going forward. For now, I’m not changing my allocations at all. I’m still unflinchingly short the dollar.

Via: Bloomberg:

Treasury Secretary Henry Paulson swung the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.

Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.

The announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the companies that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.

Paulson’s proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The two shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing.

Making `Explicit’

“It is time to recognize that the GSEs were always dependent upon government support and now we must make the implicit explicit,” said Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics in Torrance, California.

Paulson proposed that Congress enact legislation giving the Treasury temporary authority to buy equity “if needed” in the firms, and to increase their lines of credit with the department from $2.25 billion each. The temporary authority may be for 18 months, a Treasury official told reporters on a conference call on condition of anonymity.

As lenders retreated from the housing market, Washington- based Fannie Mae and McLean, Virginia-based Freddie Mac have grown to account for more than 80 percent of the home loans packaged into securities.

Freddie Mac is scheduled to sell $3 billion in short-term notes tomorrow, and Paulson’s comments indicate a concern about a collapse in private investors’ willingness to fund the firms. The companies issue debt to raise money for their purchases of mortgage securities.

Bond Sale

“This will shore up that debt offering,” said Paul Miller, an equity analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia. “They need to make sure that that debt offering goes well and goes very well and they couldn’t risk waking up tomorrow and having that offering go poorly.”