Sunday, September 07, 2008

Fannie and Freddie Bailout

Here is all we know so far:

WASHINGTON (Reuters) - The U.S. government announced on Sunday that it was taking control of troubled mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE), effectively wiping out shareholders' interest in the publicly traded companies.

The regulator of the two companies, the Federal Housing Finance Agency (FHFA) will manage the two companies on a temporary basis.

The takeover is the second rescue bid engineered by the U.S. Treasury Department in little more than six weeks. It came as confidence in the firms' ability to keep operating amid a deepening housing crisis continued to erode.

Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director James Lockhart, regulator for the so-called GSEs or government-sponsored enterprises, called a Sunday-morning news conference to spell out the latest rescue effort.

The announcement followed an intense round of meetings on Friday and Saturday with directors and top leaders of the GSEs, who are expected to be dismissed after having come under stiff criticism for their high pay and management shortcomings.

The two mortgage companies are a vital cog in the United States housing industry because they own or guarantee almost half the nation's $12 trillion in outstanding home mortgage debt. The housing sector would have difficulty recovering from its deepest slump since the Great Depression unless Fannie or Freddie are stabilized and able to continue their role in buying mortgage loans and packaging them into securities sold around the world.


I'm sure this will lead to a big relief rally on Monday. But the rumors and expectations for this bailout have been building for some time. As such, this news is not a total surprise for the market, and thus I do not think it has the potential to completely change the bearish sentiment on Wall St. in one fell swoop.

But so far, the market has held above the July lows. We still have quite a bit of time before the Election, but if the market does not make new lows in the interim, it would be a bullish technical pattern that should support a nice year-end rally. Patience is key.


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