Government writes Fannie and Freddie blank check, mortgage masters deemed too big to fail
Jim Rogers on the outrage you should be feeling this morning
Another bank bites the dust… rescue details reveal true “value” of mortgage-backed securities
Byron King on a jet fuel development that’s as promising as it is profitable
China’s massive forex stash grows even bigger… latest numbers reveal flood of "hot money”
Plus, another piece of Americana jumps abroad… U.S. no longer the king of watery beer brewing
They’ve done it again … another closed-door Sunday meeting… another multibillion-dollar government bailout.
The Federal Reserve, U.S. Treasury Department and government at large have agreed to provide a federal backstop for Fannie Mae and Freddie Mac. Ben Bernanke and Hank Paulson got together for another Sunday tea party yesterday, not to discuss the bailout of Bear Stearns, but this time to plan the rescue of the biggest mortgage players in the world. In a press conference yesterday, Paulson laid out the plan:
The U.S. Treasury will ask Congress today for a big blank check. With seemingly limitless taxpayer dollars, the Treasury will either purchase shares of Fannie and Freddie or grant them loans at very low rates… or both. Paulson left the door open for further government oversight, saying that the Treasury will assume a “consultative role” within Fannie and Freddie. Separately, the Federal Reserve announced it would open its “discount window” to Fannie and Freddie. Both will be able to borrow money at 2.25%, just as banks and brokerages can.
So this won’t be a true-blue bailout… the government won’t be taking over Fannie and Freddie, just shoveling billions of your income atop these smoldering mortgage masters. The part that really gets under our skin? There were no numbers. No limit as to how many shares the government might buy. No idea as to how much Fannie or Freddie should be allowed to borrow. No hint at just how much money they likely need to remain solvent. Just a promise… the government’s got their back, no matter how much it costs.
“I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” said Jim Rogers in a Bloomberg interview from Singapore. “So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation.”
“These companies were going to go bankrupt if [the government agencies] hadn’t stepped in to do something, and they should’ve gone bankrupt with all of the mistakes they’ve made. What’s going to happen three years from now, when the situation’s much, much, much worse… They’re ruining what has been one of the greatest economies in the world… there are 300 million Americans that are going to have to pay for this.”
While Hank Paulson and company grabbed the headlines all last week, the U.S. endured yet another bank failure. As we predicted , IndyMac bit the dust over the weekend. Federal regulators seized the famous mortgage lender Friday, the fifth such failure this year. What’s more, IndyMac’s $32 billion in assets ranks it as the third largest bank failure in U.S. history. You’d have to go back to the 1980s to find a bigger bank implosion.
As usual, the FDIC will back all IndyMac deposits under $100,000… of which IndyMac holds $18 billion. That guarantee, coupled with other rescue measures, will cost the FDIC $4-8 billion… wiping out as much as 10% of the FDIC’s deposit insurance fund.
“Think about this for a moment,” urges James Turk of goldmoney.com. “After liquidating $32 billion in assets, the FDIC still has to add some $4-8 billion more to make sure $18 billion of deposits are made whole. So in the worst-case scenario, the liquidation value of IndyMac’s $32 billion of assets is $10 billion. In other words, the true market value of IndyMac’s assets is only 31% of its stated book value. In the FDIC’s best-case scenario, the liquidation value of IndyMac’s $32 billion of assets is $14 billion, which is still only 44% of its stated book value.”
“Can we infer from this liquidation analysis of IndyMac that the true value of subprime and Alt-A mortgage debt still in the banking system is something less than 50% of stated book value?”
And it’s quite safe to say more banks will fail this year. As of May, the FDIC had 90 banks on its “problem list,” a number likely to go up when the regulator revises the list in August. Heh… and the kicker here… we learn today IndyMac wasn’t even on the list. What’s that say for the 90 that are?
But all is well in the strange world of the stock market. The Dow shot up 130 points within moments of the opening bell today. Not unlike the bounce after “Bear Stearns Monday,” short sellers rushed to cover their positions as the government announced the rescue of Fannie, Freddie and IndyMac.
The currency market hasn’t totally absorbed the Fannie/Freddie news yet. The dollar index dipped to 72 on Friday and has stayed at that level since. Traders seem to be favoring the euro, as the currency has jumped a full cent since we wrote you last, to $1.59 this morning. The British pound remains at $1.99. The yen is still at 106.
Gold investors, on the other hand, are reveling in the U.S. financial turmoil. The spot price is up to $965 today, a nearly $100 rise over the past 30 days.
Gas prices in the U.S. remain at record highs today. The national average is still $4.10 a gallon.
“The U.S. Air Force is putting together a program to develop a domestic synthetic jet fuel,” reports an excited Byron King. Byron recently sat down with William Anderson, assistant secretary of the Air Force, to discuss the urgent need to develop jet fuel alternatives. Byron tells us the outlook is promising, in more ways than one:
“Just as the Air Force does not employ many geologists, neither does it run refineries. So the USAF has proposed to lease acreage on its vast land holdings to private industry. The idea is that private investment will build U.S. plants to convert U.S. coal to liquid fuels.
“The U.S. Air Force wants to leverage private industry and capital to construct a synthetic jet fuel industry. And then the USAF will become the final buyer for the product.
“The USAF is among the world’s largest fuel users… it is behind about 10% of all the jet fuel that gets burned in the U.S. So just selling jet fuel to the USAF constitutes a major market.”
In other words, the government is looking to solve a big chunk of our oil dilemma with coal — a naturally abundant resource in the U.S. And they’ll let investors ride along… sounds like a decent plan. Byron’s already recommended a company set to benefit directly from this project… one that Assistant Secretary Anderson mentioned by name. Subscribe to Energy & Scarcity Investor for more details.
The U.S. trade deficit ballooned another $59 billion in May. The latest trade “balance” report was a slight improvement from April… U.S. deficit narrowed by 1.2%. The increasingly cheaper dollar allowed record exports in industrial supplies and consumer goods.
But the weak dollar also struggled to bring goods back into the U.S., namely crude oil. We found this chart in today’s New York Times… a worthy illustration of how the weak dollar can’t save our growing deficit.
China’s foreign exchange reserves have risen 35% over the past year, to an incredible $1.8 trillion. Funny how that works, isn’t it? As the U.S., the world’s economic “superpower,” mires itself in a typically bloated trade deficit and one multibillion-dollar bailout after another… China is quietly amassing a fortune in cold, hard cash.
Chinese state currency assets grew $279 billion in the first half of 2008. The majority of which could be called “hot money”… inflows from investors betting on the yuan and other direct foreign investments increased 46% over the period.
Last today, another sign of the times… America’s biggest beer brewer has been bought out by a foreign competitor.
InBev, a beer maker based out of Belgium and Brazil, struck a $52 billion deal with Anheuser-Busch this morning. The iconic American brand, makers of beloved, yet truly lousy beers like Budweiser, Busch and Natural Light, will be absorbed by InBev and become part of the biggest brewer in the world. In fact, as Anheusers’ 150-year legacy merges with InBev, the two will become the fifth largest consumer product group on the planet.
And if Stella Artois, InBev’s flagship beer, starts tasting anything like Michelob… well, one 5 Min. editor will soon be writing a strongly worded letter.
“Seems to me that Holland made the windmill look pretty good,” writes a reader, adding to our coverage of “the Pickens Plan.” “If we’re going to add wind turbines, at least have a design contest to make them look attractive, and not like a propeller from an old DC-6 attached to a steel telephone pole. Any innovators out there?”
“We have been to California and seen the wind farms,” writes another, “and we must say they look much better than the oil fields of Texas. They at least look clean. The oil fields are dirty and smell. Given the choice of having to live next to one of them, I would pick the windmill, for sure. We have to do something, and turning your nose up at a reliable energy source because of how it looks is crazy. If the reader thinks they look so bad, maybe he would like to read by candlelight?
“Probably someone will come up with an idea to beautify them, like how they make the cell phone towers look like trees. Have you also seen the oil platforms off the California coast? They have put trees on them to make them look better. The first cars were not as beautiful as some are now. Get the technology working and then work on the beautification. Maybe he likes the smoke belching out of power plants into the air we breathe.”
“Forget the charts of past bear and bull markets,” suggests another reader, this one responding to our quick look at the history of market moves. “This is a new paradigm.”
“This recession does not compare with past recessions. This is the first recession driven by a global economy. The American worker is not able to compete with foreign workers. The foreign workers work harder, get less pay and perform higher-quality work. If you don’t believe me, just ask a contractor who has hired foreign and domestic workers. I have hired both during a 20-year period. The foreign workers are not afraid of getting their hands dirty and are not constantly complaining. The domestic workers believe they are ‘entitled.’ The amount of private and public debt is enormous and growing. The public constantly accepts lies by our corporations and government. Most of the public buys expensive and often dangerous drugs that are advertised on TV. We consume far more drugs then any other nation and we rank 39th in the world in life expectancy from birth. A long and painful readjustment will take at least five years, and perhaps even decades.”
The 5: Well… that’s about five different paradigm shifts. We agree, mostly. The world is changing, and America appears to be approaching its end as the absolute economic superpower. Globalization has proven to work almost too well… indeed, foreign workers are growing increasingly more educated and capable and American workers more entitled and/or apathetic. Debt’s a big problem, that’ll have to change one day. And Big Pharma is such a crazy part of modern life we dare not attempt to take it on in our humble 5 Min.
At the same time, markets and economics aren’t always in perfect lockstep. In fact, the market’s proven to be quite good at heading in one direction while the U.S. economy goes another. By the time most of the economic plights you mention turn into full-blown crises… who knows… a bear market, a bull market and then another bear market may have passed. This ship might be sinking, but this editor isn’t quite ready to jump off the bow.
Thanks for reading,
The 5 Min. Forecast