Tuesday August 10, 2010
One of our routines here at Market Perspectives is scanning various sites before the markets' morning opening. And so I rubbed my eyes and read
Freddie Mac FMCC reports a $4.7 B loss, paid the government a $1.3 B dividend, and will, this is logical right, ask for $1.8 B to cover its $1.7 B net worth deficit at the end of June. (Mind you this is a serious article in Marketwatch rather than The Onion).
But wait Alice, said the White Rabbit, it gets better!
Two companies insured a majority of the municipal bonds that bought insurance. They are or shall we say were AMBAC and MBIA. AMBAC is preparing its bankruptcy filing as we write and MBIA claims to be making money. But then investors have poured so much money into municipal bond funds chasing yield that no one imagines a mass default which would call on MBIA.
So, as Congress mulls a $26 B bailout for various locales, the bond insurers are toast, the Federal Government becomes an ATM to bring Freddie and presumably Fannie to zero net worth status each quarter, and the Comptroller for the State of California says he will begin issuing IOUs again in September or October.
This is not a problem that will be solved with extending the Bush tax cuts nor increasing the top tax rate 3 points on less than 5% of the population. This will simply take a mass re structuring of the economy and it will be painful.
At Marketwatch, Paul Farrell dissects David Stockman's article on our pile of debt, while we are reluctant to even mention articles that spotlight one party or the other, this pretty well sums up the spend spend mantra of both parties since Nixon took us off a gold backed doilar and Congress has been free to print money.
So here we are, both mortgage companies are bankrupt, at least one of the two bond insurers are bankrupt ( and this before we have mass defaults), and we face $18 T in debt. It is absurd to think that two bond 'insurers' or that the FDIC could do what they claimed to do. There is just not enough premium to 'insure' everyone'. Nor is there enough re insurance to backstop all the promises municiplaities have made to everyone. And we doubt that their schemes would pass anything like an actuarial test for risk. As the saying goes, all debts must be paid whether in default and bankruptcy or otherwise.
Hmm, Marketwatch explains why the FED can't fix real structural problems. Hmm, now there is phrase for our times in this article. people with real estate related skills.....what does that mean, simply that there is no market alternative, read real job, for thousands of realtors, mortgage 'brokers' and paper shufflers as the market for real estate disappears.
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