Both Republican and Democratic members of Congress agree that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) may need a taxpayer-funded bailout. Amounts of the bailout have ranged as high as $25 billion.
While this is a whopping big bucket of money, it pales in comparison to the $217 billion worth of non-agency securities that have fallen in value and the $1.5 trillion in debt downgrades in 2Q alone. In order to mitigate objections from taxpayers opposed to using public monies to bail out a quasi-private industry, those bulwarks of fiscal responsibility in Congress are beginning to draw up plans to curb executive compensation for those who will help Fannie and Freddie crawl out of the hole.
In 2007, Fannie Mae President Daniel Mudd earned a $2.2 million bonus on top of his $10 million salary. Members of Congress want to know why the executives who ran the ship aground were rewarded handsomely for doing so. Some members of Congress have suggested that previous executive bonuses should be given back to the companies. I bet some taxpayers might want to apply this same reasoning to Congressional salaries and perks.
Bloomberg News reports that the 8,500 banks and S&Ls in the U.S. hold $8.56 billion worth of foreclosed homes on their balance sheets. And most of those $6.9 billion, are held by two companies -- Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). They hold 81% of the foreclosed properties but 50% of the mortgages -- more evidence that Fannie and Freddie financed far more bad loans than their standards should have permitted.
This inventory of foreclosed homes weighs down the entire housing market. Generally, such homes sell for a 20% discount -- and that's not good for the prices in the neighborhood. Bloomberg reports that the prices received for foreclosed properties have declined -- from 93% in 2005 to 74% of the unpaid mortgage principal. Moreover, unless the bank pays to cut the grass and otherwise maintain the foreclosed home, its poor curb appeal taints the neighborhood a bit for potential buyers.
Talk about an interesting day for E*Trade (NASDAQ: ETFC). The broker, a competitor of TD Ameritrade (NASDAQ: AMTD) and Charles Schwab (NASDAQ: SCHW), reported Q2 earnings on Tuesday after the market closed. E*Trade saw its stock close up on the day by almost 11% on better-than-average volume ahead of the press release. Then, after hours, the stock was down over 15% as investors digested the data. It was a wild ride indeed, and I'm glad I wasn't on it.
E*Trade saw its total net revenue decrease by 20% to around $532 million. The loss per share came in at 19 cents. According to this Reuters article, Wall Street was hoping the loss would only be 14 cents per share.
E*Trade isn't out of the woods yet, and I think it'll be a while before it fully turns itself around and recovers from the financial crisis it's been suffering. In fact, the release mentioned how the broker lost value on investments in preferred equities of Federal National Mortgage Association (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) in July and that the liquidation of the investments will impact the third quarter. Yeah, I'm sure shareholders of E*Trade love to hear the names Fannie Mae and Freddie Mac thrown around in the earnings report. They're sure to warm the heart.
At one time, I thought E*Trade was worth entering, and it obviously might have been worth trading ahead of the earnings (if you were quick to get out before the after-hours, that is). Now, however, I'm reticent to put any new money to work in the financial sector. It's going to be a while before the financial malaise finally lifts. Since E*Trade is still losing a lot of money and missing estimates, I see no reason to allocate any investment funds here. The stock has become too speculative, and if you want to speculate, I'm sure you can find safer sectors to place some bets.
Disclosure: I don't own any company mentioned; positions can change at any time.
The Wall Street Journal's "Fund Track" reported that some banks struggling to raise capital may sell their money management units. National City Corporation (NYSE: NCC) is selling its Allegiant Funds, Fifth Third Bancorp (NASDAQ: FITB) is considering selling its Fifth Third Asset Management, and KeyCorp (NYSE: KEY) will possibly sell its Victory Capital Management unit.
The Wall Street Journal also reported that Andrew Cuomo, the New York state Attorney General, is preparing to file civil securities-fraud charges against UBS AG (NYSE: UBS), possibly as early as this week. Sources said the lawsuit may include allegations of malfeasance by senior UBS executives.
WEB SITES:
Bloomberg reported that money manager John Paulson, the owner of Paulson & Co., is launching a hedge fund that will provide capital to financial firms which have been damaged by the housing crisis. Paulson, who wants to open the fund by December, used bets against the U.S. housing market to help him earn $3.7B in 2007.
After U.S. lawmakers reached a deal on legislation to alleviate the housing recession, the House of Representatives will today vote on a rescue plan for Fannie Mae -- Federal National Mortgage Association (NYSE: FNM) -- and Freddie Mac -- Federal Home Loan Mortgage Corporation (NYSE: FRE). Representative Barney Frank said that the package, which increases the likelihood Treasury Secretary Henry Paulson will get the authority to inject capital into the two, is "fully acceptable," Bloomberg reported.
Oil trading losses forced SemGroup LP, which used to be America's 12th largest private company, to declare bankruptcy yesterday. Reuters noted that SemGroup LP's parent company is SemGroup Energy Partners LP (NASDAQ: SGLP).
The New York Times reports that as the White House pushes Congress to fund its bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), it is finally getting around to scrutinizing their financial condition. Is there any chance that the inspection will NOT reveal a critical need for the Congressional bailout? No. That investigation is guaranteed to support the White House's case.
The Times reports that the Federal Reserve and the Office of the Comptroller of the Currency (OCC) will be inspecting Fannie and Freddie's books. This comes at a time when the Office of Federal Housing Oversight (OFHEO), which should have been tracking their condition, is due to be wiped out.
Meanwhile, the Times reports that Fannie and Freddie are on the hook for some big obligations. They owe $1.5 trillion; they "own or guarantee more than $5 trillion in mortgages"; and they have derivative contracts to hedge $2 trillion worth of mortgage risks. I am curious what else the Fed and the OCC will be looking for as they inspect the books. I hope they can figure out how much cash Fannie and Freddie have available to pay off their obligations over time. But why doesn't the government know this already?
The Fed and the Comptroller of the Currency want to know how Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) are doing financially. No one seems to know for sure. That means the price of a bail-out of the companies is up in the air
According toThe New York Times, "The financial condition of Fannie and Freddie is of keen interest to members of Congress, some of whom have expressed concern about approving a plan without a clearer understanding of the value of the possible losses."
The questions out of Congress are fair enough. The fact that the two firms do not already have answers to the questions is disturbing.
It is hard to imagine how Fannie Mae and Freddie Mac could have gotten so off track that they cannot give an adequate assessment of their own books. Perhaps if they had know more about their balance sheets and had implemented better forecasting and risk controls, the current mess would not be nearly as dire.
When no one knows how bad things are, they usually get worse.
Douglas A. McIntyre is an editor at 247wallst.com.
TheStreet.com's Jim Cramer says they're not just the opposite of longs -- they have the power to destroy companies.
Today will be riotously ugly. Today's a day where you could take down a Capital One (NYSE: COF) (Cramer's Take) or a Citigroup (NYSE: C) (Cramer's Take) -- some bad credit card exposure there -- off of American Express (NYSE: AXP) (Cramer's Take). You can bang down Nat City (NYSE: NCC) (Cramer's Take) into oblivionville off of it and hammer Merrill Lynch (NYSE: MER) (Cramer's Take) to the point where you could hear the rumors fly of capital needs. Freddie (NYSE: FRE) (Cramer's Take), merciless Freddie, right at ya. Today's the day when the uptick rule would be the only friend to the notion of owning stocks without fear every minute, fear that they will break your stock. Today's the day that the uptick rule can save Lehman (NYSE: LEH) (Cramer's Take) from $14 or lower. Today's why we need it.
Yet, every time I do a piece that talks about the need to reinstate the uptick rule or enforce the naked short laws, I am immediately greeted with the same nonsense: why should the longs get protection the shorts shouldn't? In fact, other than the usual gang of two -- Patrick Byrne and David Patch -- I don't get any positive feedback on these pieces like the one I did last night on "Mad Money."
Struggling mortgage lender Paragon is reportedly in talks with The Blackstone Group LP (NYSE: BX) about a potential takeover by Blackstone, the Financial Times reported.
OTHER PAPERS:
The New York Times reported that TiVo Inc (NASDAQ: TIVO) will today introduce a "product purchase" feature in partnership with Amazon.com Inc (NASDAQ: AMZN). Under TiVo's plan, the television remote control will be turned into a tool for buying products that are advertised and promoted on talk shows and commercials.
Stocks futures are lower Tuesday morning, indicating U.S. stock markets will start on a down note following weak outlooks and disappointing financial results from several companies including Apple and American Express. With oil steady and no economic data out today, Wall Street will focus on earnings.
Apple Inc. (NASDAQ: AAPL) reported after the close Monday a record quarter that beat analyst estimates, posting a 31% surge in earnings. Mac and iPod sales satisfied investors, while iPhone sales were somewhat on the lighter side. What concerned investors most was the very weak guidance Apple gave, which was weak even by Apple's standards of lowballing. Other issues included margin squeeze and Jobs health. Apple shares were 10% lower in Frankfurt and premarket trading. American Express (NYSE: AXP), said late Monday its second-quarter results fell 38% due to the weakening economy. The company, which missed projections, caters to the more affluent who have good credit, and yet even this company felt the pains from the slowing economy. AmEx earned 56 cents per share compared to estimates of 83 cents per share. The company's stock tumbled AXP shares are down over 12% in premarket trading.
Also reporting Monday after the close were Merck & Co., Inc. (NYSE: MRK), Texas Instruments (NYSE: TXN) and SanDisk (NASDAQ: SNDK). MRK shares are down over 6.6% in premarket trading as the company said it would stop give guidance of results. TXN shares are also declining over 10.5% in premarket trading after it gave a disappointing forecast. SNDK shares are plunging over 16% in premarket trading after it swung to a Q2 loss, missing analyst estimates.
This morning we'll have another wave of earnings, and already started were DuPont and Wachovia.
People with the matter said that Ken Wilson, The Goldman Sachs Group Inc's (NYSE: GS) most senior financial-institutions broker, will temporarily exit the firm, the Wall Street Journal reported, in an effort to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis.
The American Federation of State, County, and Municipal Employees, a union with a stake in Citigroup Incorporated (NYSE: C) called for the financial services company to break itself up. The Financial Times reported that the demand will almost definitely be rejected by Citigroup.
OTHER PAPERS:
Treasury Secretary Henry Paulson's plan for rescuing Federal National Mortgage Association (NYSE: FNM) -- Fannie Mae -- and Federal Home Loan Mortgage Corporation (NYSE: FRE) -- Freddie Mac -- calls for the creation of a new regulatory agency that would seek to assert more stringent control over the banks and lessen the damage they could cause to the American financial system, the New York Times reported.
The Daily Telegraph reported that BP Plc (NYSE: BP) blocked a $1.8B dividend payment to its Russian partners in the TNK-BP joint venture.
WEB SITES:
According to paidContent.org, now that its cash on hand exceeds its market cap, speculation that Napster Inc (NASDAQ: NAPS) could be a takeover target heated up.
Back in the early 1990s, the U.S. was mired in a recession and the money center banks were in dire straits. But, of course, it was a great opportunity for investors.
So, are we seeing a repeat? Perhaps so, although, you still need to tread carefully. This is according to a front-page piece in Barron's [a paid publication].
And yes, this week has been particularly encouraging, as seen with a widespread rally in the financials. It certainly helped that there was strength from Wells Fargo (NYSE: WFC) and JPMorgan (NYSE: JPM). At the same time, the results from Citigroup (NYSE: C) weren't as bad as expected.
By any measure -- such as price-to-book values and P/Es -- the financials look extremely cheap. Besides, these companies are taking quick medicine in terms of write offs. In other words, once financials report next year, the comparisons should look strong.
Something else: the Securities and Exchange Commission has implemented new rules on short selling (regarding 19 financial companies). Ultimately, this may relieve some of the volatility.
Wall Street analysts have said that Freddie Mac (NYSE: FRE) would not be able to get by without raising money. Its losses from the current mortgage crisis have simply been too great. At one point it looked like the Fed would open its doors to provide the company loans and Treasury would buy stock in the company.
According toThe Wall Street Journal, Freddie "is considering raising capital by selling as much as $10 billion in new shares to investors."
After a sharp sell-off in its stock, Freddie has watched its shares move up over 50% in two days because investors believed the government help would keep the firm from becoming insolvent. Now that the value of the stock is somewhat higher, it may turn out to be a good time to get some cash in the barn.
But, the company's shareholders are likely to take a brutal beating. Freddie's market cap is only $6 billion, so the dilution of bringing in $10 billion would be stupendous. The move could certainly push the stock down to the $4 level over time, unless the company can post results well above what analysts expect and push the current share price way up.
Of course, the shareholders are not to blame, but they will be left holding the bag. Freddie management bet that it could get better returns on its portfolio by getting into risky investments and were burned like most banks and brokerage houses.
No matter how poor their judgment was, management will probably keep their jobs. Maybe they will even get a fat bonus for raising the new capital.
Douglas A. McIntyre is an editor at 247wallst.com.
According to people familiar with the matter, the Wall Street Journal reported that Federal Hole Loan Mortgage Corporation (NYSE: FRE) --Freddie Mac -- is considering raising capital by selling up to $10B in new shares to investors. The sources believe this effort may have the potential to avoid a full-blown government rescue.
The Wall Street Journal also reported that, amid U.S. investigations into allegations it helped American clients evade taxes, UBS AG (NYSE: UBS) said some Swiss-based private bankers will stop offering American clients Swiss bank accounts and other services.
Starbucks Corporation (NASDAQ: SBUX) will close store in 44 states plus the District of Columbia, including 88 closures in California, 59 in Florida and 57 in Texas, the Wall Street Journal reported.
Reuters noted that, according to a person with knowledge of the plans, Yahoo! Inc (NASDAQ: YHOO) could renew talks over News Corporation's (NYSE: NWS) Web properties if Microsoft Corporation (NASDAQ: MSFT) gets in the way of discussions with Time Warner Inc's (NYSE: TWX) AOL. Yahoo! is in contact with News Corp. about the assets, but the search engine's talks with Time Warner about AOL are more advanced, the source added.
Advanced Micro Devices (NYSE: AMD) stock is down 6.6% in premarket trading after the company posted its seventh consecutive quarterly loss of $1.19 billion, or $1.96 per share, missing Wall Street estimates. The operating loss would have been 60 cents a share, heftier than the loss of 52 cents a share from analysts polled by Reuters Estimates. Following the report, AMD also announced that CEO Hector Ruiz would be replaced by COO Dirk Meyer. Ruiz will stay on as executive chairman.
The Wall Street Journal reports that Freddie Mac (NYSE: FRE) is considering raising capital by selling as much as $10 billion in new shares to investors. FRE stock is down again this morning after the recent wild swings in share price. This morning FRE shares are trading over 5.7% lower in premarket action.
Mattel Inc. (NYSE: MAT) shares rose nearly 4% in after-hours trading following second-quarter financial results. The toy maker's profit fell by nearly half, but results still beat Wall Street expectations. Global Barbie sales dropped off 6%.
The Wall Street Journal reported that it is the Bush Administration versus Democrats versus Republicans to decide the strategy to stabilize Federal National Mortgage Association (NYSE: FNM) -- Fannie Mae -- and Federal Home Loan Mortgage Corporation (NYSE: FRE) -- Freddie Mac. The Administration's plan would let the Treasury Department advance a credit line and the opportunity for the government to buy equity in either firm. A package is expected to pass but not before the political and economic ramifications are battled out. Democrats and Treasury want it to be a part of a housing rescue plan; Republications oppose it.
The Clinton Foundation, headed by former President Clinton, believes it has a pricing agreement in place that it expects will make malaria drugs affordable and available to millions of poor people worldwide, the Wall Street Journal reported.
The Financial Times reported that UBS AG (NYSE: UBS) and Liechtenstein's LGT Group will today be accused by U.S. Congressional investigators of using the "cloak of bank secrecy laws" to help American clients evade billions of dollars in taxes.
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Stocks futures are lower Tuesday morning, indicating U.S. stock markets will start on a down note following weak outlooks and disappointing financial results from several companies including Apple and American Express. With oil steady and no economic data out today, Wall Street will focus on earnings.
Back in the early 1990s, the U.S. was mired in a recession and the money center banks were in dire straits. But, of course, it was a great opportunity for investors.
and 
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