Reuters reports that Fed Chair Ben Bernanke met yesterday with Freddie Mac (NYSE: FRE) chair Richard Syron and told him that Freddie and Fannie Mae (NYSE: FNM) would get access to the Fed's emergency discount window. (For those who are new to these two companies, the New York Times has a helpful graphic that helps explain them.) This is what he did to the entire investment banking industry earlier this year when Bear Stearns was headed south.
Now that Freddie and Fannie are free-falling, helicopter Ben is preparing to open the discount window to them as well. This means that these two government-sponsored packagers of mortgage-backed securities will get access to taxpayer's capital instead of going through the arduous process of trying to raise capital from private investors.
I wish I could get the Fed to bail me out when I make bad investments. This is what it means to be too big to fail. But since the Fed will not confirm the Reuters report, we will need to wait to see whether this report is true. Freddie was down 3% during regular market hours -- it had been down as much as 50% during the day. Fannie tumbled 26% during regular hours. Its stock had also been sliced in half earlier today.
Update: Dealbreaker reports that the Fed has denied that it will provide discount window access to Freddie and Fannie. The Fed's decision to wait until after the market closed to make this denial is a particularly unsavory kind of market manipulation. But unless a deal is announced over the weekend, the Fannie/Freddie shorts will have a good week ahead.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
7-11-2008 @ 9:35PM
GoBoilers said...
With the credit market recovery predicated on the precarious balance derived from Federal Reserve liquidity injections, capital infusions by sovereign wealth funds and investment managers, and bailouts of major financial institutions, one must wonder if this period of stability has legs. Prior fits of turbulence in late summer 2007 and March 2008 led to dramatic market seizures that froze access to capital, eroded confidence in counterparties, and led to the demise of two dominant financial institutions. The current credit market predicament is the result of years of overabundant liquidity and exorbitant hubris among Wall Street bankers that led to an inexplicable decoupling of risk and return. Begrudgingly, market participants are revaluing deflated assets as the extent of credit impairment in the financial system continues to be exposed
7-12-2008 @ 1:54AM
Lawrence Phoenix said...
Thank you GoBoilers...let's see if I correctly interpet the Greenspanise...Power-Drunk Wall Street investment banks bet the farm with borrowed money neatly forgetting they can LOSE. Now that they've lost their hair's on fire and their ass is catcin'. Hopefully the Fed along with China and select Mideast powers will be able to dump enough cash on the deal before it burns down the whole worldwide Keebler Tree ; but the jury's still out..Sound 'bout right ?