Mike Larson discusses the problems that the U.S. economy is facing with government sponsored enterprises. In this issue of Money and Markets, Mr. Larson takes a closer look at Fannie Mae and Freddie Mac and the lack of capital each one has.
Jupiter, Fla. (PRWEB) July 13, 2008 -- Mike Larson discusses the problems that the U.S. economy is facing with government sponsored enterprises. Mr. Larson takes a closer look at Fannie Mae and Freddie Mac and the lack of capital each one has.
Currently, the biggest problem the U.S. economy is faced with is its government sponsored enterprises, or GSEs. For a while, Fannie Mae and Freddie Mac have been under pressure due to concerns about their derivatives exposure, losses on their portfolios of loans and mortgage securities, and the collapse of the mortgage insurance firms they rely on to help support their businesses. The problem is capital; Fannie Mae and Freddie Mac don't have enough of it. They need to sell more shares, more preferred stock, more debt, or some combination to shore their balance sheets.
In a recent debt sale, Fannie Mae had to give up the largest amount of additional yield versus Treasury securities ever. That's a sign bondholders are increasingly worried about the credit quality of the two GSEs. And the credit default swap market, where investors buy and sell contracts designed to protect bondholders against the possibility a company will default on its obligations, is also pricing in more risk at Fannie Mae and Freddie Mac. Things are getting so shaky that the government is reportedly preparing contingency plans in case one or both GSEs continue to roll over. On July 10, the Wall Street Journal said that ideas include the Federal Reserve offering Fannie Mae and Freddie Mac a credit line, or the government taking an equity stake in the companies.
It's not just Fannie Mae and Freddie Mac that are in trouble. Marshall & Ilsley, a midsized bank based in Wisconsin, just announced it would have to set aside $900 million in the second quarter to cover losses on housing and construction loans. That was 35 times the loan loss provision a year earlier.
Triad Guaranty, one of the leading mortgage insurers, was just forced to stop writing new policies due to the losses it's been suffering on mortgage policies. Its shares have fallen from $58 to less than a dollar. And Merrill Lynch lost $2.2 billion in the third quarter of 2007, $9.8 billion in the fourth quarter, and another $1.9 billion in the first quarter of 2008. And it's on track to lose billions more going forward, forcing the company to consider selling off assets to raise capital.
"Suffice it to say, there is no way to ignore this problem any longer. It's here. It's growing larger by the day. And you simply have to take steps to protect yourself. That includes raising cash to ride out this crisis, hedging with inverse exchange traded funds or mutual funds and avoiding financial stocks like the plague," Larson states.
To read this issue online, please visit:
http://www.moneyandmarkets.com/Issues.aspx?Mortgage-tremors-rocking-the-financial-world-1952
About Mike Larson and Money and Markets
Mike Larson joined the company in 2001, and has more than 10 years of experience researching and writing about personal finance, investing, and the housing and mortgage industry. In 2003, Mr. Larson was named associate editor of the company's monthly Safe Money Report. In this role, he is responsible for writing and editing as well as analyzing trading opportunities for clients. Mr. Larson is also a regular contributor to the company's daily e-letter, Money and Markets.
Before joining Weiss Research, Mr. Larson was a personal finance reporter for Bankrate.com, where he wrote extensively on mortgage lending, banking, residential real estate, and Federal Reserve Board policy. His responsibilities included analyzing economic data and interest rate trends for a weekly column and developing rate forecasts for a regular index feature. Previously, Mr. Larson held positions at Bloomberg News and the Boston Herald.
Recognized as an interest rate and mortgage market expert, Mr. Larson's views have been quoted in the Washington Post, Chicago Tribune, Dow Jones Newswires, Reuters, Sun-Sentinel and the Palm Beach Post. He has also appeared as an investment expert to discuss the housing market on CNBC, CNN, and Bloomberg Television. His writing has been acknowledged by both the National Association of Real Estate Editors and the Massachusetts Press Association.
Among the first analysts to call the housing slide, Mr. Larson's new policy paper, "How Federal Regulators, Lenders and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" has received broad media coverage following its July 2007 submission to the Federal Reserve and FDIC. Mr. Larson holds B.A. and B.S. degrees from Boston University.
Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.
###
|
