Market Comfortable with Fed Action on GSEs

There's no rest for the weary, as the Federal government spent the weekend scrambling to stabilize the financial system and stock market.

With Fannie Mae (FNM), Freddie Mac (FRE) and the financial system hanging in the balance, we were greeted Monday morning by a trio of press releases from the Treasury Department, Federal Reserve and the SEC. It became immediately clear the Federal government has been scrambling to save the financial system, and avert perhaps a stock market crash.

Fed Action

The Federal Reserve Board quickly authorized Ben Bernanke to "bail out" the GSEs if necessary, so the financial backstop provided Bear Stearns is certainly there, no matter the consequence to the Fed's balance sheet nor the value of the dollar. As for Fannie and Freddie shareholders, well, the Treasury seems to have your interests in mind as well (see the next section).

Even so, Wall Street Greek believes this debacle is clear and unequivocal evidence that the GSEs should never have be private sector entities in the first place. The failure to recognize that in the past falls squarely on the shoulders of our government.

Treasury Department Hope and Prayer

The Treasure Department issued a release Monday morning as well. It offers a three part plan that includes the option for the Treasury to buy into the GSE shares. Paulson indicated that the entities should remain shareholder owned. We're guessing the government recognizes the heavy burden of taking these companies completely under government control; this is not Bear Stearns. At the same time, the government probably thinks it could turn a profit on its stock as the economy stabilizes. Let's face it, what this amounts to is government bailout of the shareholders of the GSEs, while saving the financial system. In any event, it's a necessity to avoid dire consequence.

SEC Blame Game

The Securities and Exchange Commission is coming down hard on traders who basically facilitate the spread of information for the better good of the market. However, we cannot argue that rumors helped to do in Bear Stearns (JP Morgan Chase (JPM)), and have played a big role in some equity market activity.

Clearly, spreading false rumors for the sake of personal gain, while sending the financial markets into turmoil and potentially creating a catastrophic economic consequences cannot be tolerated. So, kudos for the government here... There's no excuse for this kind of selfish activity, but we warn, be careful not to step on the feet of American constitutional rights in the process.

What this Means for Trading Today

Well, if it works, it means the market will bounce sharply on the comfort that the government has got our backs. But, if investors and traders don't buy into the government's plea, based on concern that it is incapable of follow-through or that the consequences of the effort would be nearly as bad as the failure itself, then we're in for another tough one.

But, based on past successes and the naivete' of the community mindset, we expect the market will take comfort in these actions and look cautiously higher this morning. In the meanwhile, smart money is looking into just how bad things might get if the government has to follow through on its promises. Sovereign money is also paying attention, and we will for you as well.

Stock index futures indicate the market is comfortable with the actions and so expect a reversal of last week's panic, for now...