Historic Financial Collapse Underway?

I tend to be in hotel rooms when bubbles burst.

On January 6, 2000, I was on the 30th-something floor of the Marriott hotel across the street from the convention center in San Francisco. I was jet lagged and up working even though it was still dark outside, around 5:30 a.m. local time. Just then, Lucent Technologies announced earnings before the market opened. After beating expectations for 15 quarters in a row, Lucent missed its earnings forecast by 18¢. Much worse, it reported a $1 billion drop in revenue. You can't miss on revenues by $1 billion unless something is horribly wrong.

And something was horribly wrong. It wasn't clear until months later, but that was the morning the bull market in tech, telecom, and the Internet died. I vividly remember that morning. Believe it or not, I didn't have to look up the date or the details on the earnings miss. That morning is seared on my brain. It was the end.

I don't believe it was a coincidence I was in San Francisco that day. We financial scribblers follow the market. We cover what's hot. I visited tech capitals San Francisco, Boston, or Seattle nearly every month during the big bubble of 1998-2001. It was an incredible, exciting time. I'm glad I got to see it up close and personal.

This month, I got the same feeling I did back on January 6, 2000. It's over. And I was watching it all collapse, at the epicenter.

Recently, I was at the Four Seasons Hotel, looking down over the Las Vegas strip. Fannie Mae (FNM) and Freddie Mac (FRE) have finally cracked. While the stocks haven't gone to zero yet, it's clear the market woke up to the obvious fact equity holders of these companies are holding worthless pieces of paper. From my hotel room, I could see many of the reasons why...

Las Vegas may end up being the single-largest source of mortgage defaults. Upscale home prices here have fallen nearly 40%. The $2 billion Cosmopolitan hotel development is in default. The $6 billion Las Vegas Plaza is being delayed. Even Donald Trump has put his second tower on hold. It's a bloody mess.

Meanwhile, City Center, a $9.2 billion condominium/hotel development on the strip, is still going up.

Pre-construction sales began in February of last year – just before the financial markets shut out condo developers completely. I can see six huge cranes and the enormous steel infrastructure, half wrapped in glass. I cannot embellish on how big City Center is.

Each of its six main buildings seems bigger than any existing building in Las Vegas. This is the largest privately financed development in the history of the United States. It sits in the middle of a desert, in a city whose economy is dominated by gambling. Those two facts alone would give most reasonable investors pause.

The entire complex is five-star. One-bedroom condos here sold for $700,000. And the complex includes literally thousands of them. What will they be worth in foreclosure? I'd bet less than $200,000. And who will absorb those losses? I can't help but think in another two years we will look at those buildings and wonder, "What were they thinking?"

On a smaller scale, the same problems and the same questions are being asked of real estate buyers all over the United States. And the answers are not pleasant. By a huge margin, the largest owners of residential mortgages in the world are Fannie Mae and Freddie Mac.

Whether we like to admit it or not, the entire market for housing in the United States has been corrupted by government involvement. By subsidizing the availability of credit and by granting huge tax incentives to home speculators, the government helped finance the biggest bubble of all – the biggest bubble in history. It won't be unwound without serious disruptions to our economy and, unfortunately, a tremendous amount of pain.

I was listening carefully this week to the congressional testimony of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson. Both insisted Fannie and Freddie have enough capital to continue their operations. Paulson sounded just like a Latin American finance minister on the eve of devaluation.

Incredibly, they both insisted all that was needed was more regulation! I felt like I was watching a kind of financial Nuremberg trial, where the main perpetrators of the crime were utterly oblivious to the evil they'd created. I was aghast.

Consider: Only 20 years ago, the U.S.'s total outstanding mortgage debt made up roughly 30% of our GDP. Homeowners held large stakes in their houses – close to 70% of the equity on average. Today, mortgage debt equals nearly 80% of GDP. The average homeowner owns less than half the equity in his home. This seismic change in the nature of home ownership and debt financing occurred nearly overnight – in less than one generation.

Fannie Mae and Freddie Mac made it all possible. Released from capital-ratio requirements and backed with a line of credit at the Treasury, they were able to buy a nearly unlimited amount of mortgages. Today, Freddie or Fannie finance more than 80% of all new mortgages in the United States. Over the last several decades, their presence in the market greatly lowered interest rates, created an endless supply of credit, and pushed housing prices higher. Meanwhile, the cost of the government guarantee, which lay behind Fannie and Freddie's power, was invisible.

Now what?

The size of the bailout of Fannie Mae and Freddie Mac could easily surpass $1 trillion. But Congress has no understanding, at all, of what's about to happen.

In 2003, chairman of the Senate Banking Committee Chris Dodd refinanced his home mortgages with Countrywide Financial (CFC), receiving a below-market interest rate that allegedly saved him $75,000 a year. He never disclosed the benefit to the Senate and claimed he was in Countrywide's VIP program because he was "a good customer of Countrywide's" – which is as bald-faced a lie as has ever been told in Washington, D.C.

In any case, the bill Dodd is getting through Congress (which was written by Bank of America (BAC), by the way) will create a new tax on Freddie and Fannie – 4.2 basis points on all mortgages they buy. That would generate about $600 million annually.

And, the money won't go into the general fund. Most of the money (65%) will go directly to the secretary of Housing and Urban Development, who will pass out the loot in the form of block grants to states. The Treasury secretary will get the rest of the money. He's allowed to give it to any nonprofit entity he chooses. And that means, whoever wins the presidency will get another $600 million (or more) each year to kick back to political backers. All for "affordable" housing, of course...

If Congress had any idea how serious the problems with Freddie and Fannie were going to become, they wouldn't mess around with a new tax or allowing a rival to Fannie and Freddie (Bank of America) to draft the bailout. Clearly, Congress has no idea how much trouble Fannie and Freddie face. Here's my estimate:

Freddie and Fannie own or guarantee $5 trillion (yes, trillion) in U.S. residential mortgages. I'm convinced mortgage losses after recoveries will exceed 10% of the total outstanding and could exceed 20%. Thus, over the next 12 to 24 months, Fannie and Freddie will likely face losses of between $500 billion and $1 trillion. That's a huge amount of money, even for Congress.

There's simply no doubt Fannie Mae's and Freddie Mac's shareholders will be wiped out. Last month, I wrote the market value of the mortgages on their balance sheets has fallen by at least 5%, wiping out all of their equity. And when you factor in the off-balance-sheet guarantees these firms have sold, it was impossible to imagine they remained economically viable...

I'm embarrassed to admit my estimate of Fannie and Freddie's viability was hugely optimistic. Both firms seem unlikely to last through the end of July. Readers who followed my advice in June are up over 70% on their short positions in Fannie and Freddie.

I'm certain the government will do whatever it takes to ensure Fannie and Freddie continue to operate – but that doesn't mean bailing out the shareholders. All the government will do is guarantee Fannie and Freddie's debts. That means a huge amount of taxpayer money is about to go into troubled mortgages. A huge amount of money the government doesn't have and won't be able to increase taxes enough to afford. And that means inflation is going to get a lot worse. The government is going to pay for guns, butter, and housing. Look out.

The value of the dollar is going to go down, and the price of everything else is going to go up. I think this sets the stage for a true inflationary crisis – as the economy can't adjust to soaring commodity prices. I also find it hard to believe our foreign creditors will continue to hold U.S. Treasury bonds if the U.S. Treasury takes on all of the mortgage losses of Fannie Mae and Freddie Mac. I think they'll dump our bonds and that will literally be the end. No more world reserve currency. No more pegs to the dollar around the world. We'll be on our way to banana republic status, in terms of credit quality.

What's the best way to protect yourself and to make money on this looming crisis?

You must buy gold and silver as a hedge against a further collapse in the value of the U.S. dollar.

Most people don't spend any amount of time thinking about the value of the dollar. It has never occurred to nine out of 10 Americans that the last 35 years mark the first time in recorded history that every major financial power in the world operated with fiat (paper) money in the absence of a World War. No monetary backstop exists anywhere – no limit in any country to the amount of paper the government can create on a whim. Meanwhile, the track record of every experiment with fiat money is 100% perfect: In every case, the currency regime was eventually destroyed by an inflationary crisis.

I believe we have begun the monetary crisis that will end the dollar standard that has governed world trade since World War II.

I can promise you, the same way I promised readers that GM (GM), Freddie Mac, and Fannie Mae were "zeros" – the U.S. dollar's strength will continue to fade.

Slowly, bit by bit, Americans will realize this. Our foreign creditors will realize it, too. The result will be a flight from the U.S. dollar into other assets – at any price. Please set up your affairs now, so you can profit from the coming panic, not be a victim of it.

Writing the most recent issue of my investment advisory – my third strong endorsement of precious metals in as many years – I can't help but feel like Chicken Little. Are things really this bad? Well, let me ask you which do you think is more likely?

Scenario one: The U.S. government recognizes its severe financial mismanagement. It allows Fannie and Freddie to collapse completely and does not assume their liabilities. Mortgage investors take huge losses. Mortgage rates soar to more than 10%. Housing prices fall 75% – which makes housing affordable for millions of Americans previously priced out of the market.

In the meantime, the government cuts spending by 30% and reduces taxes radically to encourage economic growth (which, ironically, increases tax receipts, leading to a balanced budget). It restructures Social Security, moving the age of retirement to 75. And most importantly, the government gets out of health care completely, renouncing all of its Medicare obligations. Hospitals and doctors immediately drop their fees to meet the affordability requirements of a free market.

Scenario two: The U.S. government refuses to take responsibility for causing a bubble in mortgage finance. Rather than allow the bubble to deflate quickly, it bails out Fannie and Freddie. Mortgage losses build for five years, reaching more than $1 trillion. Housing prices stabilize in good neighborhoods, but risk-averse lending practices result in widespread vacancy across broad swaths of America.

Refusing to substantially raise taxes, annual deficits surpass $1 trillion in 2010. Total government debt begins to spiral out of control as our interest costs mount. Our foreign creditors lose confidence in the dollar and begin dumping it on the world market. Inflation surpasses 20% annually and prices for energy soar. Oil reaches $250 per barrel. The president alleges an international conspiracy to destroy America and threatens to attack China if it continues to sell the dollar. Price controls are instituted.

No paper currency regime has ever lasted. No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP). A default is not likely – it is inevitable.

The answer seems obvious and urgent. Make sure you own a substantial amount of gold and silver. I prefer to own plain bullion. Buy gold and silver bullion and bury it somewhere safe. The gold won't rust. Silver is more difficult to manage, but the best way to own it is to take physical possession.

That's what I strongly recommend you do. Right now. Seriously. I wouldn't be surprised to see prices of these metals soar if Fannie and Freddie are taken over by the Feds, which is what I expect will happen.

Is there a chance I'm wrong about all of this? Is there a chance the death of Fannie and Freddie will mark the end of the crisis? That financial stocks will rise from here and gold and silver will fall?

Yes, absolutely. At some point all of the bad news will be in the market, and prices will turn before the fundamentals improve. So, yes, I might be Chicken Little. I might be dead wrong. But I don't think we are anywhere near the end of the real estate bubble collapse, and I know we haven't even begun to deal with the fiscal imbalances of our profligate politicians.

One more thing... I wish I were wrong about all of this. But I don't believe the debts of our government and many of our neighbors will ever be repaid. As a nation, we've essentially bankrupted ourselves over the last 20 years. And the consequences of those actions will be felt by several generations of Americans, at least.

I worry about the middle class, people who generally lack the financial knowledge and resources to protect their savings. They will probably believe the lies they're told by the mainstream press about "greedy" speculators and evil oil companies. They will almost surely support the policies and the politicians who are actually responsible for their increasing poverty.

I also worry about people who are retired and depending on the government to support them. They will surely see their standard of living decline substantially.

And finally, I worry most of all about my infant son. Will he grow up in a vastly different kind of America than I did? He could. And that makes me saddest of all.

Disclosure: None

Comments

[Gary Lucido:]

I completely agree with everything you say. What I don't understand is why the GSE's stock is going up right now. I've been buying puts.

2008 Jul 18 08:27 AM

[buyitcheap:]

Gary - your thought is correct. this is a bounce in the midst of a bear trend. you'll be able to buy ever cheaper puts until the GSE's nosedive again.

As to which scenarios play out - I truly hope it's the first, but given the cowardice of politicians and the constituencies, we'll wind up with 2.

2008 Jul 18 08:42 AM

[Melancholy ...:]

If you want to play the bankruptcy game and buy puts, let's see, the 10 delta put in FNM for September expiry, the 5 strike, looks like it's trading for .80 cents, which works out to an implied vol of 230. It's low delta, not much gamma to trade, even if the stock's realized vol the last few days has been up at crazy levels. It's more of a binary option on the equity going to zero, ok, I get that, so maybe you don't care the break-even is 4.20, but do you really want to gamble on the timing like this?

The only bankruptcy that buying puts outright is good for is the personal kind. If you want to gamble, go to Vegas. It's a hell of a lot more fun.

2008 Jul 18 09:54 AM

[sensetti:]

As long as the US has the strongest military the world has ever known, strategic conflicts will be created, the dollar will remain the reserve currency, because the toughest kid on the block takes your lunch money at will. Until a viable alternative is created,the world turns on oil, who ever controls the oil, controls the game, The US has placed a strategic base in the middle East to control that oil, its that simple

2008 Jul 18 11:28 AM

[Andrew Clif...:]

Fantastic article. Everyone should read it.
Sad but so true. Politicians have finally wrecked the economy. It will take a generation to recover.

2008 Jul 18 12:51 PM

[Jon T.:]

So according to Sensetti, the 191 countries in the worlds that are not the United States of America are going to sit back and allow the US to throw our weight all over the world in order to control oil and manipulate the global financial system. How's that going to work out for the US? It seems totally unrealistic to think that military might alone when you are one country vs 191 countries is going to work. It's a very provivialistic and short-sighted view of the world. And, it's plain wrong. It might have been right 20 years ago. In fact, it was but that tactic has been played out completely. That's why the wheels are coming off. Time to change the game plan. Time for a fresh eye and new thinking. Obviously.

2008 Jul 18 01:53 PM

[what about ...:]

So, when there is a new reserve courency and the dollar goes down big time, gold will go up big time terms of dollars. What is the likely outcome of gold prices based on a new currency system as we rebuild from the ashes?

2008 Jul 18 02:53 PM

[Piltdown Man:]

Sensetti's got his head so far up his wahoo I'm surprised he's able to work his keyboard.

U.S. hegemony, economic and military, is in reverse. Like the author said, every fiat currency regime has ultimately ended in the crapper. And if a 'strategic base in the middle East' were enough to secure cheaper oil, we wouldn't be paying $130+ a barrel for it like everyone else.

Boy, you need to log off your computer and hit those GED books a bit harder.

2008 Jul 18 04:34 PM

[sensetti:]

Why are we in Iraq, and why will we stay, no matter who's elected? Because oil is a vital national interest, and that tactic has not played out I argue, because at this very moment we occupy a foreign country. No one has stopped us and no one is capable at this. I simply believe we will not give up our hegemonic position as long as our mighty military is standing, history bears this out. Thank you I will consider the GED, should time allow

2008 Jul 18 05:10 PM

[Dollar Pimp:]

Sensetti, you need to turn off Fox News and listen to the first hand accounts of US military personnel from Iraq Veterans Against the War -

ivaw.org/wintersoldier

Like the economy, even our "mighty military" has a breaking point.

2008 Jul 18 06:11 PM

[Jon T.:]

"As long as Rome has the strongest military the world has ever known, strategic conflicts will be created, the Uncia will remain the reserve currency, because the toughest kid on the block takes your lunch money at will. Until a viable alternative is created,the world turns on spices and silk, who ever controls the spices and silk, controls the game. Rome has placed strategic bases throughout the Empire to control that spice and silk, its that simple." Anonymous Roman Emporer AD 475

2008 Jul 18 07:59 PM

[Greg from C...:]

Inflation, I run an oil company and we are evil. It cost me $1 million cdn dollars to drill a 2000 meter well in December, $1.1 million cdn dolllars to drill the same well in Feb. and $1.2 million cdn dollars to drill in April and I just saw and AFE for the next well at $1.32 million dollars. If oil were to fall below $100/bbl I would stop drilling as it would be uneconomical. Here is how it works. $1.32 million to drill means $2.0 million to complete and put on line. $100 dollar oil equates to $65/bbl after governement taxes and royalities. $15/bbl to lift and process means $50/bbl left to pay capital. 1 in 4 wells are dry & G/A costs leave $40 for net return on capital. If the well is good at 100bbls/day then we get $4000/day net. Wells run on average 250 days a year due to weather breakdown etc. The decline rate on average is 15%. This is a two year payout of capital without decline, 2.3 years with decline. This is cut off for the investors, I would have a hard time convincing people to invest if payout on capital was over 2 years due to the extreme risk. I could have a blowout (cost in excess of 10 million), failure down hole (total loss + cost of cleanup and abandonment) or loss of life, the capital is risky so investors rightfully expect returns. But I am an evil capitalist, it has to make sense as I am also an investor and if we continue down this path I am sorry for my children and their children as they are going to come up in a prefoundly different world, I hope the unwinding works for the better.

2008 Jul 19 11:51 AM

[tc399:]

You can't eat bullion. If the financial markets fail completely, and that's certainly a possibility, so will the tax base. When that goes, so does the government infrastructure. When we went into Iraq I stopped buying anything I couldn't either eat or barter and I'm not going to trade my eggs and vegetables for gold bullion. I live in a place that will never run out of food or water and can switch to a completely agrarian society within days; and that is exactly what might be required for a while in a few years. I hope not. But I am a student of history as well as science. The government has been cooking the books and the rest of the world sees that we are no longer in a position to impose our will. If Mexico decides to take California back next week, there is no one available to stop them. We have become Rome and sent our armies to the far lands while the senate bickers and does not care for the needs of the citizenry. History is about to repeat.

2008 Jul 19 01:03 PM

[Sergio:]

While I agree about most of your advice, I don't like the "invest in gold" advice.. gold prices depend on demand, which is partly due to people "saving" in gold, but mostly due to the industrial uses of gold.

Gold is WAY UP from where it was 5 years ago. If a US / China recession ocurrs, expect it to decrease.

Why not invest in Euros instead? They are gonna do a lot better job controlling the inflation.

2008 Jul 19 09:43 PM

[Eclealeph:]

Be careful about gold and silver; normally it is the traditional hedge against fiat currency and all of its attendant miseries. But consider the following:

"Howl ye rich man...for your abundant wealth has rotted and is ruined and your many garments have become moth-eaten. Your gold and your silver are completely rusted through and their rust will be a testimony against you and it will devour your flesh as if it were fire. You have heaped together treasure for the last days." James 5:1-3

The eventual destruction of all world economies is not a result of stupidity but rather it is intentional, its purpose being to bring about a single one world fiat currency which can be controlled by a privileged few. Mayer Rothchild said,"If I control the currency of a government, I control the government." And since gold and silver are ever the enemy of fiat currency, quick work will be made of them and since it is usually the rich who can afford to hedge into them, they will be the ones doing the howling.

2008 Jul 19 11:14 PM

[Sultan:]

I agree with the content and i also sense the same. I am more concern of India as last recession was not fully affected on india due to geographically diverse consumer country. But it is more expose to foriegn country and may affect 30 to 40 % this time. Capital account convertibility will be at halt is such crisis continues.

2008 Jul 20 06:45 AM

[you_can_cal...:]

"I'm convinced mortgage losses after recoveries will exceed 10% of the total outstanding and could exceed 20%."

I'd like to see a little more on this. How did you arrive at these estimates?

2008 Jul 20 08:05 AM

[Richard Neva:]

Buy gold and silver, hmmmm. That fell with a thud on my hard of hearing ears. I am so far in debt I can't buy food! My car sits in the driveway, I can't leave home. I am supposed to buy gold and silver? I sold two gold wedding bands from my failed relationships for a hundred worthless dollars and that was good. Give me break, give me a Marxist Revolution will you please and dump this demonic capitalism we seem tied too. It has proven worldwide to be a failure!

2008 Jul 20 08:08 AM

[optionsgirl:]

Holding oil and gas investments seems like a solid strategy. You'd think that the price of oil collapsed ( at a mere $132 a barrel) if you read all the investment newspapers.Commodities are going higher, that's the place to invest. Gold and silver are a temporary hedge. Silver is actually better than gold, it has industrial uses.

2008 Jul 20 08:09 AM

[John Cordes:]

Wow, sounds bad. I think you should start investing in fall out shelters and rain barrels. But just to be sure I understand your solution, you're for renouncing all health care subsidy, and hoping for house prices to fall 75%, (so everyone can afford them?). Umm! Falling prices made everything accessible during the great depression huh? Would that be card board houses next to railroad tracks?

2008 Jul 20 08:20 AM

[CLH:]

Smile. This sounds like a convention of the negatives. Which hotel are you in now? --So I can stay away.

2008 Jul 20 08:48 AM

[EUARTE:]

I have to assume that all that money flowing into countries like Brasil will not only stop but reverse. Although ignored by most financial reporting, the R$ is a powerful currency. Almost daily the US$ goes down against the R$.

So, if you were an American, having only US$ to live on, your purchasing power will increase. If you are on Social Security even a near destroyed US$ will be worth more that the R$ and other emerging countries currencies.

The answer is get out of the states and move to another country where the currency will be destroyed by that countries stupity. Just be careful which country you choose. You may end up in a not so nice revolution.

As for gold, I would agree to some extent that it "may" help one survive. If you do own it own it physically. I would guess that the gold issued coins, although expensive, may be the best to have for living on a day to day basis. For investment bullion will be best.

Fannie and Freddie should quitely and quickly be burried. The faster we rid ourselves of these monsters the better. NO bailout. The Secretary of the Treasury is not interested in the country but only one street...Wall Street.

At long last it should be openly said by everyone that Greenspan may be the second worst government employee ever. The first is the morally corrupt Congress who allowed him to continue in office.

2008 Jul 20 08:48 AM

[Bruce Krasting:]

I agree that the odds of a soft landing are not very good. I have trouble however, with your forecast.

Does any one remember the "New Paradigm"? The idea that emerged in the late 90's to explain that you do not need earnings to justify a stock price?

The "New-New Paradigm" of this decade is that the global economies have decoupled and that what happens in the US no longer matters to the global economic cycle. Rubbish.

If half of what you describe takes place we are headed into a great deflation. Not inflation. It it will happen globally.

Euro land has a lot of weak economies in it. That currency is no safe have in the storm you describe. The Japanese economy has been in the tank for 20 years. The aging population limits domestic demand. In the future economy you describe there is no safety in the Yen.

China is in trouble today. It's weakness is masked by the Olympics run up. That currency will be a bust too.

So what currency do we buy? No gold. Not silver. That is like getting long oil at $150. A losing strategy.

I am not sure where the safe place to hide is. I am convinced that the logical choices, precious metals, will not prove to be a safe haven in a massively deflationary global economy.

It will be interesting to watch this unfold though. Good luck to all.

2008 Jul 20 09:09 AM

[low:]

A gold recall (on the sly), is being advertised on t.v. as a selling opportunity! Don't look now but I wonder whose
ultimately behind it and why?

2008 Jul 20 09:34 AM

[bigdog1:]

The next event: home in foreclosure, "lets move in", squatters occupy the empty home and when the banks get around to reclaiming the property, the squatters claim homesteaders rights and want to take it over. Does the government side with them and goodbye property and thus destroying the banking system???

2008 Jul 20 09:38 AM

[friend:]

The " learned " author suggested that Fannie / Freddie due to worth zero dollar while the US dollar should slide .

The author , impressed me that salvaging Fannie / Freddie , the two government sponsored entities ( GSEs ) is like a " crime " .

I heard one said that the recent foreclosures stem from two sources :

1 ) the subprimes alleged to be fraud related ; someone organized to inflat property values by fraudulent appraisals and then mortgaged same to banks under the names of individuals with poor credit ratings ; the walking away would reap good profits for the organized criminals while leaving the banks with huge expenses and over valued properties .

2 ) the severe drop in price of the financials since October , 2007 have left traditional investors broke and unable to make mortgage payments . Foreclosures thus extended to the real people .

The " naked " short sellers intensified the damages on the economy .

Judging from the history of loss incurred by Citigroup (C) , the subprime issue can be speculated as over or almost over ; loss from over 10B in the 4th Q , 2007 to the 2.5B in the 2nd Q , 2008 .

The main hurdle now is the foreclures inflicted with the traditional investors or the good guys who lost all by confronting the unreasonably sharp drops in bank prices since October , 2007 .

Say , Regional Finance (RF) , a profitable regional banking network which has little or no exposure to the subprime , went down from $ 23 to $ 7 from April to July or in just three months .

Oh , RF has about 1.5% non performing assets (NFA) which are lands good for home construction purposes .

The real estate maxim tells us that land by nature , appreciates in value . Such NFA is in fact valuable asset to the bank and the same leaps when the real estate market becomes normal .

Investing into the future and thereby invest in financials .

When financials go back up to a reasonable level , the good guys would have their savings back to update their mortgage payments .

As a result , foreclosures would be reduced and the real estate market would be back to its normal functioning .

Some article indicated that Fennie / Freddie were told by the US government to loosen up their policy in accepting mortgages at the time when the subprime problem had surfaced while banks then generally raised their standards .

Such " startegy " was an attempt by the US government to boost up the real estate market at the time .

That attempt failed for the loose rules would naturally , invite more fraudulent subprimes .

Fannie / Freddie ended up with mortgages that they would not accept under their own policy .

On viewing the year 2001 / 2002 downturn , Fannie / Freddie flared better than or comparable to strong pretigeous banks like Bank of America .

Fannie / Freddie have proven themselves to be effective and profitable when being allowed to use their own standards in assessing mortgage applications .

Even being handicapped , the combined loss to date for the two GSEs is about 10B which is about the same as what Citigroup has lost in its 4th Q , 2007 .

Such quantity of loss is obviously manageable under today's standard .

Freddie's CEO has repeatedly told the media that their retained earnings are sufficient to finance the GSE through this crisis .

The shoring up by the US government is more for gaining back public confidence since half of the US mortgages are guarenteed or owned by the two GSEs .

Yes , substandard policy attracts frauds and eventual mortgage failures .

Published articles indicated that the substandards were used by subsidaries of investment banks and not regional banks .

The two GSEs straddled into these substandards reluctantly on a demand by the government to salvage the real estate market .

One would trust that the two GSEs would be more than happy when being allowed to go back to their own lending practice proven to be effective and profitable .

The " learned " author accepts that the economy would completely collapsed should the two GSEs fail .

The shoring up of the two GSEs would avoid such collapse .

The author however , suggested that a complete collapse in economy would best serve the US people as oppose to the backers' claim that the US people would benefit when the two GSEs or economy being uplifted .

People do have difference in opinions .

2008 Jul 20 09:41 AM

[notsosmart:]

the safest investment is cans of tuna.you cant eat silver,gold,etc.you eat the tuna,drink the tuna juice & hope your neighbor wont know so he can kill you for it with the blessing of the supreme court(everyone can be armed).oh, this cant happen here.maybe not as long as most are at the stadium swilling (now)belgium beer.

2008 Jul 20 09:57 AM

[Synergizer:]

This has been a long time coming. People didn't want to listen to guys like Robert Kiyosaki and Donald Trump who have been telling people we're heading for the biggest collapse in history as well as the end of the middle class as we know it. One of the things they recommend is to start a home based business in Network Marketing. Historically, in times such as this, the Network Marketing industry has boomed. How much more so during this long hard slog through the economic murky future? Get yourself familiar with the business model and do your due diligence. You can't afford to scoff at this anymore or remain in ignorance of it. Ignorance is definitely not bliss. Economist Paul Zane Pilzer has said, despite this economic trouble, that 10,000,000 new millionaires will be created through Network Marketing over the next 10 years. Where do you want to be in that picture? Contact me to get a free video that will educate you about this industry and the business model. Don't sit there and say you didn't know. Because that excuse has now been taken away from you.

2008 Jul 20 10:07 AM

[gollwoods22:]

whatever.. economy is a mess people have no money after gas fill ups small business is going under from high prices and lack of customers, the jobless will be hungry and pissed off in the cities and cold too this winter. you better buy bullets and now.

2008 Jul 20 10:31 AM

[Marty:]

Great article! I wanted to add some stuff .

- In 1999 the Nasdaq was 5000 its 2200 or so now. In 1989 as the Japanese real estate bubble burst the Nikeii Average was 40,000 its 18,000 now 20 years later. Their real estate market retraced 20 years of gains as well. I feel it is not totally out of the realm of possibility that a much longer recovery trend like that in Japan can happen here.

-Regardless of the economy there are other factors -HUGE outflow of investment funds to baby boomers retiring. These people were able to save more than the next generations AND had the benefit of company pensions (also invested) that will now be coming out of the market just as new money in gets tougher as people cant save.

-Additional Risk - State and Local revenue -People are not driving on toll roads as much and they need to raise tolls. Property taxes are going to be a nightmare to collect, and sales taxes are down. There are some serious risks in that environment to state and local Govt spending (and related bonds etc)

-Not sure if I agree on the gold thing. The last year has shown you might have been better off buying food that you can store , things like rice , flour etc LOL But there is a valid argument in the currency collapse market.

THOSE THINGS SAID...

As a CPA in the northeast part of the country I have seen this mess coming for over 2 years. Just like the signs were clear to me 2 years ago I am seeing some limited signs of the seeds of recovery taking place. It could very well be far off but let me tell you about the few positive things I have seen..

1- The small business credit crunch seemed to ease when the Fed lowered rates. I dont know why but between Oct 07-March 08, it seemed like noone had money, now people seem to be hanging in there .

2- Some clients are reporting better sales (surprising even themselves). In the last 2 years I have not had a handful of people telling me anything good the same day but I am starting to get those reports.

3- Some new business formation is going on.

4- Looked into details of some financial stocks reports. IT appears to me that places like Citibank and Merrill Lynch are 6 months away from a turnaround. For example, Merrill has reported 40 billion in some odd losses already. They only have 4 billion or so left in CDOS in total.

5- Private people (like Boone Pickens for example with the Energy plan) are starting to step up to the plate with ideas.

There is an all bets off death scenario though. That is if we get involved in another war. Then I think its over.

Id like to state one more thing..

from a year ago to about 6 months ago the Govt essentially lied about inflation, unemployment and the jobs market.

Now the facts are out there. At least people are playing cards with the reality deck now. The risks are out there. Just articles like this one might show a bottoming process.

I have been very negative on things but call it as I see it. I do see some things moving in the right direction. It might be a dead cat bounce as they say but I am hopeful that we are wrong and things will turn, everyone makes out better that way and ill eat crow anyday over not having anything to eat!

Marty

2008 Jul 20 10:32 AM

[sr9web:]

Sensetti, don't listen to those dummies - your explaination for why USA is in Iraq and why the world will keep (fearfully) respecting us, is 100% correct and totally spot-on.

2008 Jul 20 10:46 AM

[Joyful Alte...:]

The government should cut taxes so its revenues increase? Didn't GW already do that more than once? And where has that taken us?

It's still voodoo economics, almost three decades later.

2008 Jul 20 11:32 AM

[unimpressed...:]

The economy will experience a miraculous recovery when the price of oil falls to reasonable levels. Then, all the pundits, analysts, and politicians will proclaim how they solved the problem. Over time, even more nonsense will emerge from these and other sources of, in their opinion is, profound wisdom.

The market place that encourages egregious greed is now, and always will be, the source of economic unrest and destabilization. Until we ascertain how to control this without damaging capitalism, we will, always, be in danger of the debilitating effects of outrageous avarice.

All other opinions are just an excuse to make a living from, apparent, wisdom and insight. Simplicity resulting in real insight will never be in vogue. Otherwise, all those who blather about things they obfuscate with excessive verbiage would have to get real jobs.

The market place that encourages egregious greed is now, and always will be, the source of economic unrest and destabilazation. Until we ascertain how to control this without damaging capitalism, we will, alwasy, be in danger to the debiliating effects of outrageous greed.

All other opinions are just an excuse to make a living from, apparrent, wisdom and insight. Simpiicity resulting in real insight will never be in vogue.

2008 Jul 20 11:59 AM

[contender:]

I always find it hard to believe in extreme scenarios. The truth almost always ends up being somewhere in the middle.

That said, I think the number of perps...err... goldman sachs...err.. governemtn officials they are trotting out to tell us that we worry too much is another 'tell' that things are worse than normal.

It all hinges on housing. What breaks the downward spiral ? Its a degenerative feedback loop, and what breaks it -- especially as the government offshores our jobs and devalues our dollar so there will be fewer and fewer solvent families and individuals to sop up the excess inventory and stabilize prices ?

What breaks the cycle ?

2008 Jul 20 12:22 PM

[LiquidSoapD...:]

Very interesting article. One thing I wonder about is how you (and others) think high mortgage rates and very low housing prices are such a good thing (makes housing affordable). But there's no mention of the problems this would cause. If the value of most people's homes fall far below what they owe on them, we will see people walk away from them at a scale that makes today's foreclosure rate look like nothing. You think that won't be it's own catastrophe? You're gonna have to explain to me how this could possibly be a good thing, rather than just seeing the "affordable housing" side of that equation.

2008 Jul 20 12:26 PM

[adan:]

re: "...I felt like I was watching a kind of financial Nuremberg trial...."

i've remarked on other articles on seeking alpha that the stuff going on in re to fannie and freddie, and selective enforcement of existing naked shorting rules reminds, not exactly, but in tone, etc, reminds me of pre-wwii germany - not good

but a probable very negative future for your son, or my granddaughters, is not necessary -

fuels alternatives are already available and, in ten yrs, could replace dependence on oil;

the tax structure could be overhauled (i personally like the flat tax, despite it's con's, 'cause of its psychologically promoting quality of a sense of fairness and incentive equal for all);

and a way to provide at least the level of health care available to the rest of the industrialized world currently not available to us, could be found

a lot of could's - i know

but then, who would've thought, in the late 1700's, the world would even see a country such as ours even existing to possibly squander such an improbable "could" ?

2008 Jul 20 12:46 PM

[the blindly...:]

HI all,

I have read the article, and many of the comments. For the most part I agree with everything in the article. Despite this, there have been many times in the past where one would have thought that the american ecomony surely cannot simply rise from the ashes of its economic stupidity. We are heavily indebted, some assets have become extremely overvalued, and so on and so forth. This has yet to be the case. Every market decline EVER has been a buying oppertunity. And while I was short seller of many differant assets over the last two years, I am now a buyer. do I feel comfortable about it? no. do i even agree (aside from a rather large yeild in financial stocks, no i think there are many more shoes to drop), and yet I am a buyer. We can argue and banter numbers and statistics all day. and there are reasons on both sides to be both extremely bearish, and yet very bullish. All i would remind others of, is by some measures, the american economy is not as indebt as our EU allies, or Japan, and so if we had to take on another trillion dollars to bail out freddy and fanny, theoreically we could.

I have a hole in the back yard where I keep a few hundred cans of food, lots of water, toothpaste, soap and several hand guns, with lots of amunition. I also am long the XLF, and the USD.

I hope I never have to fire a gun.

2008 Jul 20 12:46 PM

[Regina:]

I am a single black mother, make 52,000 a year, owned my own house for 15 years. Have a retirement plan and small savings. I don't have an extra 1000 for an ounce of gold, I can't buy stocks because you have to buy an incredible amount (look at Google) to make it worth it or have had to have been bought 25 years ago to be making money now. (in a lot of cases)
Walmart is complaining demand is down (don't make us mad we are going to sell the bonds if you don't shop at our stores) CNN is telling you to plant a garden. Cities are going to raise the price of public utilities to balance the city budget because so many houses are in foreclosure. Medical costs are out of the roof because doctors want patients to pay for their student loans and privledged lifestyles. No one wants to vote for Obama because they say he has no experience, but look at the mess BUSH got us into. So experience has little to do with anything except if you want to use it against someone. I am being sucker punched every time I go fill up 4.50 a gallon for 12 gallons of gas in a plymouth neon 1998 at that 58.00. To keep gas in the car cost more than the car is worth. No SUV's for me, and I"ve got no credit cards.
So why am I worried about my future because it's people who short the stocks, buy the stocks, scream for more dividends. The World Bank is trying to hoard the money for the few rich people who think "let them eat cake", I keep asking the money was there once, how can you loose what you never had so where is it now and I who have done nothing why am I paying for the sins of others. I bought my house with a 20/80. I never went for one of those crazy loans, I didn't buy a house before selling the one I am in, and I didn't refinance every time I wanted to go on a cruise or buy Prada or Rolex.
Who cares about what the government is gonna do because I am paying now and I am getting resigned to more pain later for something I did not do. Buying gold, arguing about Fannie Mae and Freddie Mac and future bank closings will not help me fill my tank, buy food, keep my lights on all I know is I am screwed regardless and I hope my job doesn't fold.
I just need to know where the food banks are, homeless shelters, and can I qualify for food stamps if necessary. Should my whole family move into my house so we can make sure we can cover the light bill. My brother can mow the lawn so I don't have to give money to a illegal mexican immigrant who bought a 500,000 house with "Landscaper" on his loan application. We can clean up our own messes and not hire a mexican housekeeper because we are to busy to clean our own house who by the way bought a 350,000 house with "Domestic" on her application. We can have a garden in the back yard and my sister can spend her weekends canning food so that we can have some food to eat when gas gets so high the truck drivers can't afford to bring the food to the grocery store. How do you dry out meat so when beef goes to 10.00 a pound for hamburger we can buy in bulk and have it ready for the winter when it goes up to 15.00 per pound.
Buying gold and shorting stocks will not help the average person with day to day needs. That's the article I would be more impressed with. Oh by the way I want that electric car next week when the price of gas is going up, not in ten years when people may not be driving at all. Oil is 250 a barrel and all commerce has stopped. Greed has caused this mess and a slice of humble pie will end it. Although it will take a while, people have a way of not taking ruin easily read the stories about investors in Karachi distroying their stock exchange because they were loosing too much money. (hence the stocks must have been purchased 25 years ago to weather any storms now)
Tell me what to do in a survivalist sort of way not a pump more money into this economy to help stablize it. They don't care about me and I've pumped enough money in to pay for sins of bank who loaned 850,000 for a house to a couple who said they made 1.5 million a year and then on furthur checking (after the house is in foreclosure) it was found they were both unemployed but selling one house to pay for the next.

2008 Jul 20 01:11 PM

[bearfund:]

Well, blindly optimistic, every market decline ever IS a great buying opportunity ... except the last one. I'm not willing to but that this one is not that one. Too many things are wrong to take that risk, and there are too few good men left to fix them. The only reason I still hold any stocks at all is the relentless commentary from sharp realists who clearly do understand the problems and offer viable ways out; there's always some slim chance that some of these people, like Dr. Paul, will somehow acquire power and do what must be done to turn the tide. Failing that, though, I expect my humble store of a quartet of metals: gold, silver, steel (canned food), and lead to be worth more than the S&P 500.

2008 Jul 20 01:23 PM

[Bhakta:]

I agree with you 1000000%... Keep it up and I hope some few listen and heed your warnings. The USD is a dead currency, only time is separating it from the crematorium.

2008 Jul 20 01:23 PM

[freddie:]

"They will probably believe the lies they're told by the mainstream press about "greedy" speculators and evil oil companies. They will almost surely support the policies and the politicians who are actually responsible for their increasing poverty."

LMAO! You begin and end coherently by describing 'greedy speculation' spurred by stripped away government regulation, lobbied ridiculous capital gains real estate give aways, inflationary interest rates maintained by Fed Reserves, private banks, and then conclude by exempting all players except the politicians who are under the material influence of the same forces of speculation!

And you perpetuate the idea that Big Oil conducts its business through the spot and futures oil markets because you are so concentrated on physical gold and silver which IS traded on the spot market. And you left out one scenario that is happening right in front of you - statification. Don't you find it interesting that IndyMac Bank was not liquidated, but reborn as IndyMac FEDERAL BANK, F.S.B.???? And one more thing, you express concern for the middle classes (what, no working class?), but you are willing to throw the mass of seniors with dwindling resources on the mercy of private medicine by liquidating the most functional safety net we have and the model for a national health plan- Medicare. Yes, go ahead and take physical possession of gold and heavy silver bags of coins, and then hope you don't lose it all to a home invasion robbery if the scenario you hope for comes to pass.

2008 Jul 20 01:27 PM

[ohreally:]

Peter Stansberry writes:
______________________...
Whether we like to admit it or not, the entire market for housing in the United States has been corrupted by government involvement. By subsidizing the availability of credit and by granting huge tax incentives to home speculators, the government helped finance the biggest bubble of all – the biggest bubble in history. It won't be unwound without serious disruptions to our economy and, unfortunately, a tremendous amount of pain.

Fannie Mae and Freddie Mac made it all possible. Released from capital-ratio requirements and backed with a line of credit at the Treasury, they were able to buy a nearly unlimited amount of mortgages. Today, Freddie or Fannie finance more than 80% of all new mortgages in the United States. Over the last several decades, their presence in the market greatly lowered interest rates, created an endless supply of credit, and pushed housing prices higher. Meanwhile, the cost of the government guarantee, which lay behind Fannie and Freddie's power, was invisible.
______________________...

The above statement either comes from another planet, is insane, or is just an out right fabrication.

The mortgage bubble was created by unreguated Wall St Securization by firms like Bear Stearns of loans originated by firms like Countrywide.

Fannie and Freddie were pushed aside and locked out of this fools party by the federal Government, which leashed the GSEs in favor of letting Wall St, Countrywide and Indymac run wild. Thes firms no longer exist.

In the vast bulk of their business, Fannie and Freddie did not back subprime or LTV greater than 80% except in relatively microscopic ammounts. They numbers of exotic mortages are under 10% of all segments of their business, not to mention their exotics were of higher quality because they retained their underwriting standards compared to the Countrywides and Indymacs.

As of Freddies most recent numbers, they had .77% non performing mortages.

This is why right now, while mindless bashers howl ike fools, the GSEs are the ONE source of liquidity propping up the housing market. IF the GSEs were not performing this service today, the housing market would be 10 times worse off, as the reduced but still significant buyers we now have would be shut entirely out of the market.

Compare what is being written about the GSEs with the actual reality,and draw your own conclusions.

One other thing. This article was published on SUNDAY MORNING and ALREADY HAS 35+ comments within minutes ALL AGREEING WITH ITS ABSURD ASSERTIONS. Think about that!

The article is not even well thought out. It was only in July 08 that this person realized the financials were under stress? Where was he when Countrywide and Bear Stearns fell?

2008 Jul 20 01:37 PM

[ohreally:]

Peter Stansberry writes:
______________________...
Whether we like to admit it or not, the entire market for housing in the United States has been corrupted by government involvement. By subsidizing the availability of credit and by granting huge tax incentives to home speculators, the government helped finance the biggest bubble of all – the biggest bubble in history. It won't be unwound without serious disruptions to our economy and, unfortunately, a tremendous amount of pain.

Fannie Mae and Freddie Mac made it all possible. Released from capital-ratio requirements and backed with a line of credit at the Treasury, they were able to buy a nearly unlimited amount of mortgages. Today, Freddie or Fannie finance more than 80% of all new mortgages in the United States. Over the last several decades, their presence in the market greatly lowered interest rates, created an endless supply of credit, and pushed housing prices higher. Meanwhile, the cost of the government guarantee, which lay behind Fannie and Freddie's power, was invisible.
______________________...

The above statement either comes from another planet, is insane, or is just an out right fabrication.

The mortgage bubble was created by unregulated Wall Street Securization by firms like Bear Stearns of toxic mortgages originated by firms like Countrywide.

Fannie and Freddie were pushed aside and locked out of this fools party by the Federal Government, which leashed the GSEs in favor of letting Wall Street, Countrywide and Indymac run wild. These firms no longer exist.

In the vast bulk of their business, Fannie and Freddie did not back subprime or LTV greater than 80% except in relatively microscopic ammounts. The numbers of exotic mortages are under 10% of all segments of their business, not to mention their exotics were of higher quality because they retained basic underwriting standards compared to the Countrywides and Indymacs.

As of Freddies most recent numbers, they had .77% non performing mortages.

This is why right now, while mindless bashers howl like fools, the GSEs are the ONE source of liquidity propping up the housing market. IF the GSEs were not performing this service today, the housing market would be 10 times worse off, as the reduced but still significant buyers we now have would be shut entirely out of the market for lack of mortgage availability.

Compare what is being written about the GSEs with the actual reality,and draw your own conclusions.

One other thing. This article was published on SUNDAY MORNING and ALREADY HAS 35+ comments within minutes ALL AGREEING WITH ITS ABSURD ASSERTIONS. Think about that! Also there seem to be comments predating the article post date?

The article is not even well thought out. It was only in July 08 that this person realized the financials were under stress? Where was he when Countrywide and Bear Stearns fell? This guy just wrote an article about the mortgage/housing boom bust WITHOUT MENTIONING BEARS STEARNS, WALL STREET, COUNTRYWIDE OR INDYMAC!!!!!

2008 Jul 20 01:49 PM

[Tom Lindmark:]

This guy is basing his conclusion that Fannie and Freddie will fail and thus end life on earth as we know it, on numbers he pulled out of the air. Nowhere does he show how he arrived at the projected loss numbers. While it is a back of the envelope calculation, here at least is an attempt to logically arrive at some sort of reasonable loss estimate for the two. blog.metro-real-estate...

2008 Jul 20 01:55 PM

[fsaldanha:]

This article starts well, but ends badly. I don't want to be critical, as I agree with a lot of what the author wrote. But there are quite a few absurdities. For example,

" the track record of every experiment with fiat money is 100% perfect: In every case, the currency regime was eventually destroyed by an inflationary crisis."

I don't know if the author ever heard of countries like the United States of America, UK, Japan, France, Germany, Sweden, etc. that have had fiat money for a long time and their currency regimes were not "eventually destroyed."

Another factually incorrect statement:

"No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP)."

Even if the US assumes the whole $5 trillion of Fannie and Freddie's debt, having a total (100%) loss on their assets, the public debt would still be less than 150% of GDP. Several countries repaid debts larger than that (with a little help from inflation), including the United Kingdom, which emerged from WWII with debt in excess of 200% of GDP. Chile is another example. The US debt problem is manageable if action is taken. Of course, if the country continues in its current direction debt repudiation, either through inflation or outright default, is inevitable.

2008 Jul 20 02:26 PM

[copesetic:]

It's the end of the world ,as we know it..................an... I feel fine
I think I'll dig out that cd :)

2008 Jul 20 02:28 PM

[lblaine:]

The basis for the article comes from the author's investment newsletter (Porter Stansberry's Investment Advisory), published by Stansberry Research. That monthly newsletter was published on July 11, the same day that the FDIC took over INDYMAC (but unknown at the time of publishing), and also prior to the regulatory bailout by the SEC (short sellers must borrow shares, prior to shorting). So the SA post is nine days old, which is an eternity for the short-term trader mentality of the markets.

Stansberry's articles are generally based on extensive research, including evaluation of the company finances. His dire forecasts may not come to pass, but they were not made lightly.

2008 Jul 20 02:39 PM

[varmit:]

The one scenario not raised is the possibility of raising interest rates
and that does seem to be in the offing.

Regardless of the path taken there will be wide spread pain. I do expect a nationalized health care plan and that will be the solution to the medicare dilemma.

This does not need to be the socialized disaster suffered by our northern neighbors. All Americans should see this series: Sick Around the world. Its available on the PPS web site

www.pbs.org/wgbh/pages.../

2008 Jul 20 02:45 PM

[Ray Lopez:]

I agree that FNM, FRE will not fail ("Freddies most recent numbers, they had .77% non performing mortages"). I enjoyed reading "Regina", a single black mother. How often do such people even post? A real rarity. I am long FNM, FRE and GLD, but agree with Regina that as a practical matter most people cannot afford these stocks, as they don't have money to play with. Good luck and happy trails to all...

2008 Jul 20 03:03 PM

[Maximus:]

I agree that we could be heading for deflation, an argument that Stephen Leeb makes, if the price of energy heads rise too high, too quickly (which he says is 80% year over year).

He recommends zero coupon bonds as 50% of a portfolio under that scenario.

He also recommends a 20% weighting in energy stocks (oil services and alternative energy companies mostly) in case that opposite happens -- high inflation.

The more I read, the less I seem to know about the biggest questions out there that will impact our collective future:

1. Inflation or deflation?

2. The US as world economic engine still or decoupling? Can the world economy (Asia, Europe, Latin American, Africa and the Middle East) operate normally with a vastly devalued US dollar and enfeebled US economy? I suspect not but am not sure, the Chinese know how to make a lot of things now...

3. How much can we really expect in additional losses from US financial institutions?

I am natural inclined to be pessimism about the economy but even I am beginning to feel like that pessimism is overshooting.

The most likely scenario for the world economy is that we all muddle through as we adjust to a difficult period of deleveraging and a decline in aggregate demand in developed countries (due to lower birth rates) and an increase in aggregate demand in developing countries (due to higher birth rates and a increase in total factor productivity).

2008 Jul 20 03:10 PM

[Ames Tiedeman:]

Superb read. Not sure it will play out as you suggest, but never-the-less, well said on many fronts.

2008 Jul 20 03:25 PM

[texasgolfer:]

can someone please explain to me how accumulating gold with declining dollars and current inflation is going to solve my future. Perhaps Porter can provide a chart of the rise in the price of gold in real dollars that have been adjusted for dollar value declines and inflation. I have a few golf things and when I take them to the store to pay for goods, no one takes it. I tried to sell it on EBay but people wanted to pay me in dollars which according to Porter is a losing proposition. I took out all my gold crowns and replaced them with ceramic, but had to pay inflated prices in dollars. I took all my dollars and tried to sell them on EBay for non dollars, but had no bids. I think I will join Porter and just leave the USA so I can be safe. Oh, he did not say that. Seems like he wants his son to grow up in America.

2008 Jul 20 03:30 PM

[Kelly Liebe...:]

Regina,
Go to Above Top Secret dot com. It will scare the living daylights out of you, but you will be prepared and enlightened about how serious some people view this crisis.
In fact, maybe everybody needs to take a look, because it is people like Regina and the Average Joe caught up in this catastrophe that are going to determine what the future of America looks like. For those that are a little better off - they are likely to buy what they know - gold and silver as their hedge. They don't make charts, they just make decisions.
As I have said before, before you put your $$$ anywhere, consider how a panicked middle and lower class will react....

2008 Jul 20 03:34 PM

[deaverb:]

In a 24/7 news world everything seems better or worse, faster, and more perilous than before this data flew around the world in a nanosecond. 51 great comments--already. Note: 90% plus weren't on the Internet just 10 years ago; 90% couldn't type very well. What does this mean? Enormous productivity rolling through the "system" and disrupting...everythin...

GM is in "trouble" in the US because of legacy costs, to quote the CEO. They are roaring in India & China. Wal-Mart has gone from 23% to 37% profits overseas in just 4 years (how do I know these two things--first on Alpha Alerts, then back to the original sources). McDonald's and a host of other top companies now do over 50% of their profits overseas. Wal-Mart was #1 US retailer in 1990; in 2008 their balance sheet (staggering strong) doesn't look like the same company. Housing had been one of the last rollercoasters in this economy. IP, Consumer, Retail have become increasingly solid, diverse, and profitable. We just "know" more so it seems worse. And YES because of this kind of dialogue, emulated by Jeff Jacoby in the Boston Globe, is focusing on how govt is messing around with economics, without understanding it. That's all good. Things aren't worse than they've been; there is just more light on it, such as with this author, Jacoby, and the other 51 writers. Keep after 'em. Keep it going.

My little company, Simply Software (simplymagazine.net, simplysoftwarecds.com, simplymedia.com and 20 others to the same site), just went to 24/7 downloads at $3.99 each of our 142 audiobook/software products we own outright (no royalties; no tails; ergo, no litigation). Over 50% of the sales are coming from off shore (not North America); 1% when we shipped physical products. Productivity is at 100% (all autopilot; not touched by human hands). So a $10 product is now $3.99, and we do better. That's happening everywhere, as the GMs cut back head count (aren't they making about the same number of cars with 20% of the people?). Cheer up. Why? Our fastest growing download AND physical sales are in India and China--yes, they are paying the IP!

2008 Jul 20 03:43 PM

[vaduz:]

quite a good story

2008 Jul 20 03:48 PM

[John Lounsbury:]

I doubt anyone will get all the way through the pile of garbage preceding this comment but I'll make a comment anyway. (Okay, I admit there were some excellent points of discussion here and there amidst all the trash.)

People are railing against the waste of a trillion dollars here and a trillion dollars there - total a few trillion (maybe 2, 3, or 4 - or even 5). Solve the problem of $8 trillion or more going out of the country for oil in the next ten years and the other financial strains, such as managing credit market losses of maybe $1 or $2 or $3 trillion (could be less, by the way) seem much less of an end of the world as we know it problem.

More domestic drilling? Yes, but that doesn't solve the problem because no analysis I've seen says more drilling can even keep up with replacing declining domestic production and meeting increased energy demands. Listen to T. Boone Pickens. He's no pie in the sky idealogue. Research the emerging battery storage technologies that will enable long distance travel in electric cars. You find the right investments and you will become rich beyond your wildest dreams. The same is true for solar technologies (both photovoltaic and Stirling Engine technologies). Likewise for tubine technology for for tidal, wind and geothermal energy generation. The right investments in high efficiciency power distribution systems can also make you rich.

You don't even have to consider the environmental issues discussed by many to follow the above path. All you need to be is a greedy American capitalist (like me).

Of course, none of the above will happen if the scenario described by Porter Stansberry and many of the comments posted comes to pass.

2008 Jul 20 04:01 PM

[goldragon:]

Mr. Stansberry, thanks for writing such a wonderful article.
Buy gold and silver, if you can not buy physical ones, buy ETF funds GLD, SLV, GDX and CEF!

2008 Jul 20 04:41 PM

[mlyn:]

Sensetti is not so far off base, folks. I just viewed a DVD from netflix called "Speaking Freely: Chalmers Johnson" a political scientist who wrote a trilogy (inadvertently) on how our military-industrial complex (the Pentagon) and the CIA i(the private army of the State Dept.) enforces our foreign policy. Without the threat of military force, the U.S. is a superpower no more since it manufactures nothing constructive (only destructive), it is in debt, the dollar is tanking. The U.S. establishes military bases, pays its workers (military personnel) minimally with fewer and fewer benefits, and provides no audited statements.

2008 Jul 20 04:55 PM

[aapladay:]

In the global economy we are just to dependent on each other for one country to let the other go under. The middle east might want all of our money, but they must strike a balance or we will rebel against oil like we are have been doing.
Like some readers have said, if our economy goes to crap, gold will not be the thing to own, it will be food, tools, and equipment. The worst case scenario is we will not be able to drive, but still have electricity because we have abundant resources for it. We have enough farm land for food.
Bears always act like there is money to be made in a world that goes back to living in huts. NO! Money is made in a world of progress and growth. Scaring people to death with articles and comments like this is a great way to scare people out of the market and make money with your shorts.
There are so many ways to be creative and get out of this housing mess. One is for someone like me to upgrade to a nicer house and the person who couldnt afford that could move into mine. It really comes down to a game of musical chairs, but with houses.
And gas? It is so easy to fit 4 people into that gaz guzzling SUV and turn that average 15 mpg commute into an average effective 60 mpg per person. There are also so many old good used Hondas and Toyotas that get 30+ mpg, I know, I owned a Honda for commuting and a Ford truck for house projects.
Yes, this could be the worst moment in world history if we listen to crap like this, OR we could use it as an opportunity to go to the future we have been dreaming of since we were kids.
Well please forgive my unorganized rant, but I hope I made some points.

2008 Jul 20 04:56 PM

[fubar02:]

Most of Stansberry's article is solid. The only problem I see with it is that as a student of and believer in the Kondratieff Wave and member of "Who's Who in Hard Money Economics" in the early 1980s, I wrote an advisory article that sounded pretty much the same. Back then they called people like me "gold bugs."

Now twenty five + years and constantly inflationarily later, the U.S.A. is still here, oil prices are up once again, and the dollar is again in deep do do as it should be. (Last time it was saved by a hike in short rates to near 15% as I recall.)

Today we seem to be back at a similar point in a long-term cycle as we were in 1981+/-.

As an investment advisor then, I found the hard way that meritoriously dwelling on the true risk of fiat currencies was no way to make or save client money over a forseeable future, for gold dropped from $850 an ounce to about $250 and silver from near $50 an ounce (the market was cornered...maybe like oil is today) to $4.15.

All this happened, of course, while the U.S. continued to inflate the money supply and put interest rates at fire sale levels.

That of course added fuel to house prices, allowing Wall Street to securitize the smoke and sell it to the rest of the world.

This is all to say that while my head and gut tell me the author is right, historically the U.S.A. has managed to muddle through some pretty tough stuff (weak $, Vietnam War, collapse of the savings and loans, etc.) in the not so distant past.

Hopefully, this muddling medium-term cycle will continue and the very long-term and complex one signifying the complete decline and fall of the U.S.A.'s currency and democracy will be further off in the future this trip as it was last time.

2008 Jul 20 04:59 PM

[Old Wizard:]

When the sky is falling, let's protect ourselves with an umbrella of gold. If only chicken little knew this, how happy he would be. I'm sitting here wondering whether the mortgage crises or global warming will get all of us first. All of the doomsday prophecies aside, the last comment is right on. Solving the negative cash flow out of the country primarily due to the importation of oil is what we as a people ought to make priority one. Turn on the search for domestic oil recovery and create a Nasa-like organization to produce alternative energy generation like our nation's survival depends on it--because it does. Protecting your lifestyle or your family if the USA falls apart is like taking a bucket of ice into a raging fire to protect yourself against the intense heat. We still can affect the politicians and make it known to them that if they don't stop arguing the either/or position on oil drilling and alternate energy means we will vote for the other guy. The same time it takes all of us to respond to this article could be devoted to writing our Congressman and senators with the above message.

2008 Jul 20 05:26 PM

[Ultra Power...:]

I totally agree, and people I try to warn think my name is Chicken Little. Somewhere along the way, our US financial system got hijacked by The Federal Reserve Board, which is NOT a federal governmental agency, and there is NO RESERVE. It's simply a private board of greedy bankers that steal our productivity and "savings" via a silent tax: insideous inflation. Soon to be run-away Hyper-Inflation, bananna republic style. Somewhere along the way, Americans were fooled into thinking that money is paper, while they stole the GOLD. Could the demise of the US Federal Reserve "note" have been planned all along??

We have already been told about the coming new currency called the Amero (like the Euro in Europe) that will be used in Canada, USA, & Mexico. Of course, monitary control & policy of the North American Zone would have to be even further consolidated into the hands of the greedy private bankers, possibly the current Federal Reserve Board Bankers.

Mark of the Beast?? So many Americans say they will never take the mark of the beast, but after everything in our modern society as we have known it falls apart, people who were paper millionares suddenly wake up to find out that they are miserably poor and needing government assistance for basic necessities such as food, perhaps they may think very differently.

The North American Trade Zone Governmental Authority is willing to offer everyone food rations, and Amero currency credits to survive and start their lives again, but you need to be RFID chipped (Verichip?) for ID purposes, and the central computer will keep track of everything for you in the new cashless society (essentially trading paper "money" for currency credits). The bankers have been wanting to go cashless for a long time because it costs so much less to process (machines instead of human bank tellers).

The Bible Prophecies are all accelerating and culminating towards the End of the Age. Better be like the wise virgins, and get your lamps filled up with OIL (the Holy Spirit) to help you through the deep darkness of the times we are entering as we await the arrival of the Bridegroom (Jesus). The Bible Prophecies also speak a lot about OIL in ISRAEL, which seems to indicate the eventual cause for the Battle of Armegeddon, as the Islamic Confederacy led by the King of the North (Rosh) comes down to "take a spOIL". The Pure Sweet Golden Honey OIL will be all troughout the Kishon/Jezreel River Valley (Megiddo). Israel is the navel of the earth... The earth is the Lord's, and the Fullness thereof... The earth is not full of molten rock, but rather, extremely hot pressurized stone OIL.

From my extensive Bible research, I believe that Israel will not only strike an enormous amount of spOIL (liquid gold, not crude black gold), but it wil come springing out of the ground from an earthquake that cracks the seal deep beneath that has kept it from shooting upward for so long... in 2008, probably in the middle of October. Even more specifically, I am almost certain that it will be a major fulfillment of a major Feast of the Lord, Tabernacles or Sukkot - 2008.

Read John 7:37- "Jesus stood up on the Great Day of the Feast (the 8th), saying, if Anyone THIRSTS, let him come unto me..."

What has been culminating lately... The world's THIRST for spOIL. Everything is getting so very ripe for the prophecies to be fulfilled. Almost all of Isaiah, Ezekiel, Jeremiah, and other books are all encoded with references to the THIRST FOR OIL, and DRINKING. Isaiah 41: "The OIL Tree" is an underground TREE like the Golden Menorah Candlestand, and Israel is the Fat Center Lamp. When all of the Honey OIL prophecies are suddenly fulfilled, then Isaiah 60- will happen, as the wealth of the whole world is brought to Israel.

Many Christians believe that Isaiah 66:8- has been fulfilled in the Birth of the Nation of Israel, but... Read it again with OIL in mind. The earth still has yet to give birth to its fullness prophecied in Israel.

May The Spirit of The Lord, and that still small voice within guide you through the perilous times ahead. God has abundant provisions for his children that trust in him and seek him early. We are about to witness the greatest transfer of wealth in the history of the world, and it is going to happen very suddenly. Prepare now, and Prosper in the perilous times ahead... Our Solar System passes trough the GALACTIC PLANE (watch U-Tube video) in 2012, and everything is going to be shaken more and more the closer we get to December 21, 2012.

Prepare now and be blessed, so you can be a blessing to so many other unprepared desparate people around you in the very near future...

2008 Jul 20 06:06 PM

[nmau:]

What utter nonsense. The doomsayers have been wrong before and will again. The US will recover and continue to dominate the world economy. Trying to refute the drivel written just takestoo much time. Lets simply see where things stand by the end of the year. That is the only reality.

2008 Jul 20 06:37 PM

[Ultra Power...:]

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

-- The Constitution of the United States of America, Article 1 Section 10

2008 Jul 20 07:43 PM

[Paulo:]

Much of reality, unfortunately, is socially constructed.

2008 Jul 20 08:09 PM

[Kunst:]

Let's keep it simple:
1. The US is deeply in debt, both externally and internally.
2. We are NOT going to be able to pay off this debt. It is increasing parabolically with no sign of reversal or even moderation.
3. The federal government already pays $400B a year in interest payments.
4. More debt will increase those interest payments.
5. Short-term, we "solve" this problem by essentially printing money. Unsurprisingly, this reduces the value of the dollar.
6. Interest RATES are going to be forced up as the dollar declines and our creditors doubt our ability/willingness to repay with real value.
7. Higher interest rates increase our interest payments, annual deficit, and total debt. The first two could approach $1 trillion per year, soon.
8. This is a fiscal death spiral. It's like being flushed down a toilet -- a one way trip.
9. The honest way to pay off this debt would be to stop borrowing and let our creditors buy up the American economy. We all wind up being employees. Profits go overseas.
10. We're not that honest.
11. "Solution": we print up a bunch of money, "pay off" everybody we owe, and call it even. We are pariahs around the globe.

The aftermath:
12. The US dollar ceases to have any independent value. It ceases to be a reserve currency. It ceases being the pricing currency for oil or anything else.
13. The US goes on a "cash only" basis, where "cash" means Euros, yen, yuan, rubles, gold, or whatever. A de facto barter system.
14. Everything from overseas (and everything we sell to overseas) costs ten times as much as today in terms of US wages and savings. Think Russia after the USSR collapse: the ruble lost 90% of its value.
15. Your US dollar savings and fixed-income (e.g. pension, annuity, long-term care) resources --10% of the buying power you expected. BTW, that includes Social Security and Medicare. Hope you weren't counting on those to take care of you.
16. We start over, out of the ashes. We live a LOT poorer. We export food and other raw materials (e.g. coal), some intellectual services. In order to rebuild our manufacturing economy, we work cheap like folks in other countries have done for decades.
17. Our oil consumption drops by half or more, as we can only buy what we can pay for with goods. This will be painful. Bye-bye, air conditioning.
18. Welcome to the US third world economy. Think Germany and Japan after World War II.
19. We will serve as an object lesson as long as humans keep history.

You think I'm wrong? Tell me why, specifically. No more fatuous nonsense like nmau's "the doomsayers have been wrong before and will again". They said that in Rome too. Denial is what got us into this mess; more isn't going to get us out.

2008 Jul 20 08:19 PM

[Kunst:]

Oh, I forgot to mention, every religious nut from every religion will trot out texts from his religion to explain why this all came from not keeping fast to his religion.

2008 Jul 20 08:23 PM

[GMiki1:]

Good article from a man who has never seemed to be an economic extremist.

Here's another good article--about how Vietnam is going onto an underground gold standard due to horrible inflation. This explains why gold is the way to go (and silver).

www.kitcocasey.com/dis...

2008 Jul 20 08:25 PM

[arbro915:]

I like your analogy to chicken little because it is the best and most obvious explanation of whats happened over the past 8 years. My regrets are that it happened at all, and that I didn't wise up until after Bush's second election. Since then, I've made the easiest money in over 30 years of investing.
I made my moves just after the elections, but I didn't really get the full appreciation of what was happening in our country until I took my grandson to see the movie.
Somewhere in the middle of this animated story, I had an epiphany. The world wasn't coming to an end. What we had in this country was panic. OK, I admit comparing the Twin Towers to an acorn and our president to a witless chicken may be insulting, callous, unpatriotic...name it what you will. But the effect has been the same. What astounds me is that with all these so-called market experts, analysts, and pundits, there wasn't iota of common sense among them to realize it.
As common with most of Disney's re-tellings, the movie ends happily with the chicken hero. But in the original story, fox ends up eating all the chicken's followers. And the sky stayed exactly where it's always been.
The world isn't coming to an end. The foxes took advantage of a situation and managed to eat a few chickens. Unfortunately, the chickens happened to be American chickens and the look of the barnyard has changed. With Bush's second election, I realized this country had been paralyzed by fear, and choices became simple: buy war and oil, and short the infrastructure. Construction and manufacturing were the easiest targets. When they started failing, finance was the next obvious choice.
None of it took a degree in economics or finance. All it took was appreciating the morals of a childrens' tale. It's also the reason I respectfully disagree with most of your comments and recommendations.
Like the sky, America is where it always was. It's certainly not worth any less, which is why it's a great time to invest. The Europeans, Arabs and Asians certainly know it.
Backing Fannie and Freddie is the single best move Congress has made in too many years, but it's a great start. Now it's up to the rest of us to step up. Now, as much as ever, our future and that of our children depends on it.
I'm betting on US.

2008 Jul 20 08:40 PM

[Steven Hansen:]

your elected representatives took their eye off of the ball beginning on 9/11. they thought the way to fight a war on terror was with guns. everybody forgot that economics is the tool of modern warfare. a lot of money has been wasted.

there are a lot more possible scenarios than Mr. Stansberry penned. there are many events which will effect how this crisis plays out which cannot be foreseen. and with the shift of global economic power from the west to the east, there are too many changed conditions to use historical data to project the future.

now that our elected officials have screwed up the war on terror, let us see how they will do on this new economic crisis. really, we should not re-elect anyone in currently in office. and for sure the same party cannot control the presidency and the congress.

preparing for a doomsday senario is a good exercise - and i would not discount its possiblility. however, it is not inevitable.

2008 Jul 20 09:51 PM

[secmaven:]

The success of Annaly mortgage in these dark times tells us about the quality of government guaranteed mortgages. No way in Hell the whole of Fannie and Freddie's mortgages are going to go south and have to be added to the national debt.

2008 Jul 20 11:48 PM

[carlita74:]

Everyone is so negative!!!!!! the bottom is near if not already there ,be ready,this is Still the greatest country to live in ,if you don't believe me try live somewhere else

2008 Jul 20 11:55 PM

[DanielMiller:]

The world won't end until the day you die. Until then, live a little and yes....drumroll....inv... for the long-term (for the rest of your life)!

In my opinion, the next 30 years will bring a technological revolution that will dwarf the previous 30 in size and scale. As the world grows "smaller" and technology advances exponentially, the average Earthling's life will continue to improve over the previous generation's. Because humans are naturally disposed towards expecting the worst, it forces us to compensate for our dire expectations through innovation and by achieving greatness for markets and societies. The rising tide of technology will float all boats who aren't stubbornly anchored.

I came across an interesting article, "9/11, Thirty Years Later", by Niall Ferguson in Time magazine dated Sept. 11, 2006. Whether his forecast is accurate only time will tell, but it's something to chew on for those who wish to fight their gloomy dispositions! I inadvertantly received the issue in the mail, and this concluding excerpt from Ferguson has stuck in my head since the day I read it:

"And so the Great War of democracy ended- not with the catastrophic bang that so many had feared but with the imperceptible hum of a technological revolution. 'We tried to give the Muslim world a political upgrade', said U.S. President Jimmy McCain, son of the former Senator and a veteran of the Iraq war, on the 30th anniversary of the 9/11 attacks. 'I guess we failed. So instead we gave ourselves an economic upgrade. I guess we succeeded.' The war that began on Sept. 11th, 2001, is now over. Back in 2006 there were those who feared that the U.S. might lose that war. Today, 25 years later, we can see they were wrong. The American Century is alive- and kicking."

2008 Jul 21 12:55 AM

[ASG:]

yet another mindless "sky is falling - the end is near" commentary wholly unsupported by facts

It is clear this author - like most others - asn has been noted by several in this thread - pretty much made up his claims out of thin air - with no basis in fact

as usual with virtually every author these days of similar doom and gloom stories - he offers ZERO factual support for his claims of worthless paper and $1 trillion in losses

Why is it so many people today are sheep - blindly following completely undocumented and un-sourced alarmist comments like this? Why is it so many refuse to take the simple step - before rushing to judgment - of doing the simplest research and looking at the actual financial numbers?

clearly this author like so many others has not bothered ....

2008 Jul 21 02:35 AM

[ASG:]

As I posted in another thread - it simply is not that hard to come up with the facts - and as to Fannie Mae the facts absolutely do not support the ridiculous claims like made here ....

======================...
Why is it that every one of these type stories - that trumpet the dangers of Freddie, Fannie - here the FHA - or even ones like Countrywide and IndyMac etc never bother to talk about teh details

All we hear is how much risk there is - how poorly they are supposedly doing - how likely they are to fail and/or need rescue

Yet - none of these predictions are supported by facts.

The strength of Fannie. Freddie, FHA and even IndyMac and Countrywide are in the underlying assets - the loans themselves.

So just how are these loan portfolios doing?

Even a nominal effort at research yields the broad facts.

Fannie Mae has appx $5 trillion in mortgages - appx 1/2 of all mortgages in the US.

Some are claiming they don't have enough capital - but once again these claims are the result of "fair value" accounting of their assets - which means pricing them at liquidation value - irregardless of the real value

Yet the delinquency rate on the FNMA portfolio - the 90 day late rate - is just 1.15% as of March 2008 ... the foreclosure rate is usually a bit less than half of the delinquency rate

tinyurl.com/FNMA-FC-RA...

So on ALL FNMA Loans almost 99% are not delinquent


FNMA Loan breakdown Q1 2008:

tinyurl.com/FNMA-LoanD...

A tiny fraction of all FNMA loans are subprime - and just over 10% are ALT-A ....

A total of 93% of all new business in Q1 2008 was fixed rate loans - and a total of 89% of all mortgages in their portfolio are fixed rate loans

Estimated average Loan to Value is 62% (38% down payment/equity)

Estimated average FICO score - 721 (generally considered in the very good to excellent range)

Fannie Mae Delinquency Rates Q1 2008 (only appx 50% will actually end up foreclosed):

tinyurl.com/FNMA-Delin...

In Q1 2008 just 1.15% of all loans were 90+ days delinquent - appx 50% of these will end up foreclosures

Majority of delinquencies are in CA, AZ, FL and NV ...

90+ day delinq rates on ALT-A was 2.96% in Q1 200 vs 2.15% in Q1 2007

90+ day delinq rates on Subprime was 7.42% in Q1 200 vs 5.76% in Q1 2007

Many of these higher risk loans were originated in 2007 and prior - with our tightened standards newly acquired loans will have lower credit risk

The delinquency rate overall is just over 1% - just under 99% of all FNMA loans are NOT delinquent - are performing as agreed

Fannie Mae Q1 2008 Foreclosure stats:

tinyurl.com/FNMA-FCsta...

AZ, CA, FL, and NV accounted for 17% of foreclosures in Q1 2008 vs 4% in Q1 2007

The Midwest accounted for 36% of foreclosures in Q1 2008 vs 44% of the foreclosures in Q1 2007

ALT-A loans accounted for 29% of foreclosures in Q1 2008 vs 17% of the foreclosures in Q1 2007

Total foreclosed homes rate was 0.1% of all mortages in Q1 2008 and Q1 2007

Out of ALL Fannie Mae loans 99.9% are not foreclosed on ....

At the end of Q1 2008 Fannie Mae had $2.723 trillion in mortgages on their books and $2.625 trillion in mortgage guarantees on their books - total appx $5.35 trillion .... up from 2007 which saw $2.65 trillion in loans and $2.55 trillion in guarantees for a total of $5.2 trillion

Fannie Mae has $4.53 billion - out of $5.35 trillion in total loans in foreclosed homes on their books a total actual foreclsoure rate of 0.085% of current book

... and they will recover appx 60 - 65% of that $4.53 billion as these properties are sold - leaving a net loss of appx $1.812 billion - or appx 0.034% of the total $5.35 trillion current book

Total "non-accruing&quo.... (delinquent) loans are appx $8.723 billion - which makes the delinquency vs foreclosed rate on the $4.53 billion equal to appx 51.9%

Yep that portfolio is in terrible shape ....

Net interest income for Q1 2008 was $1.69 billion ... net guarntee income Q1 200 8 was $1.752 billion

Total income/loss before taxes was a loss of $5.113 billion for Q1 2008 however $4.377 billion of this was a "paper" mark to market "fair value" accounting loss - and there was another $3.073 billion provision for credit losses in Q1 2008 in this $5.113 billion Q1 loss

The $5.113 billion Q1 2008 loss provided a tax benefit of $2.928 billion - which reduced the net loss to $2.186 billion after taxes

According to one report:

"As of March 31, 2008, Fannie Mae had $42.7 billion in core capital, which represented a $5.1 billion surplus over the requirements of its regulator ... If we add together their statutory surplus, current loss reserve and estimated revenues, total “claims paying resources” for FNM are $56-92 billion ... If we tax effect these numbers, we see that FNM can sustain losses of $85-141 billion over 3-5 years

What is happening is that Fannie and Freddie are required, by accounting rule, to record paper losses because the immediate trading value of the assets on their books -- and in this case assets means mortgage loans that it holds--are going down. It probably has no intention of selling those now, so that is a somewhat theoretical problem. But that's what the accounting rules require, and as a result, it must record a "loss" for those on its quarterly income statement. That loss is then deducted from the value of shareholder equity on its balance sheet, thereby reducing the "capital" it has to serve as a cushion against further losses. That's basically what all the fuss is about."

Total losses in Q1 2008 = $2.186 billion (or which $4.377 billion was a paper mark to market loss which will come back as profit as the financial markets stabilize) ... and total reserves and surplus etc $56-$92 billion ...

Yep - they are in terrible shape all right ....

-steady and increasing revenue

-increasing market share with limited competition
loss reserves sufficient to handle years of losses at
current levels

-billions in unencumbered loans they can borrow
against

-improving loan credit quality on new loans
very small exposure to riskier subprime and ALT-A
loans

-far below "market" delinquency and foreclosure rates

FHA's numbers are even better than Fannie's in most metrics - the loans in their portfolios have some of the lowest default rates of all loans according to MBA's numbers

Yet we constantly hear from "traders" like this one how terrible these institutions are doing - and never with a review of the real details - the status of the assets....

Why is that?

What are all these commentators afraid of?

2008 Jul 21 02:39 AM

[Dusty:]

The hue and cry about how evil the "Fiat" currency is ignores reality. A century or slightly more ago all money WAS gold or silver. Coins made of the real thing. A small amout of paper representing the real thing in government storage. Already there was not enough to go around. There was no way to increase the supply of the comodity and people did not have the cash to pay for goods and services or to be paid. The will to do work, the manpower, the goods (as in wheat, meat, manufactured products) were there: there was not enough coin or currency to conduct commerce and barter only goes so far, too. The only answer then and even more now is "Fiat" money.

2008 Jul 21 04:40 AM

[sbenard:]

No shortage of opinions on this one. Must have hit a nerve.

Does anyone really read them, or are they just venting? I'm for venting!

2008 Jul 21 08:16 AM

[Alukim.g:]

Kunst, you are absolutely right. I can't believe it's so hard for so many "intelligent" people to understand. US is going down, buckle up. I hope senate will wake up soon and replace those clowns in Fed and Treasury. And hopefully, one day they will be held responsible for this devastation.

2008 Jul 21 08:42 AM

[morph366:]

even if he is right about the absurdity of Las Vegas developments etc I still cannot make the jump to the idea that owning gold is the answer.

– If the dollar collapses (?) and we are all eating canned food in our bunkers what would we use the gold for?

2008 Jul 21 09:24 AM

[Alukim.g:]

I personally don't know anybody with bunker full of canned food. So I can only hope he will trade my office chair for few cans of beens. Or maybe some gold would fair better?

2008 Jul 21 09:30 AM

[Jason Rines...:]

1) Corrupt chronie capatalism government and banking, intertwined. Regina's comments of frustration are correct about bankers. As my grandmother told me (who lived through the Great Depression) 'Bankers love foreclosures'. As my 92 year old neighbor just told me the other day 'I lived through the last depression and I will live through this one!'.
2) Nations are opportunists. It appears certain, there was and is coordination between major players such as Russia, China and the GCC. The objective is wealth transfer and the method was using Islam. Bin Laden was a client of our CIA. We channeled weapons and supplies through many of his Mujahadeen contacts in 1989. This drained the Soviet's in Afghanistan to practical collapse, it took a decade longer for there nation to be more or less completely insolvent.

The USA has been drained in Afghanistan and Iraq. Call it Soviet payback using the same methodology. Our government has become to caught up in themselves to see it. Bin Laden nothing is nothing more then client of China through the Taliban. Russia and China have strategic relationship announced to counter Bush/Clinton 'New World Order' and announced such publically in 1994. These are facts, not conspiracy.
3) The USA must vastly create it's own energy supply. We will successfully do this, but first the corruptors of the supply chain in Washington of housing, energy, agriculture and defense must go. To do this, a private fund must be created outside the DNC or RNC. If private equity investors want a long-term return on America, we must invest in such a fund and get people in office that are educated yet see making $130,000 as solid income. Officials entering office are already bought and paid for by lobbyists of either the RNC or DNC. Why would existing seven figure people want to take a job for $130k?!? We know the answer and now we know the remedy for Washington. If we fail to do this, the 60 million armed in this nation will attempt to force change the Boston Tea Party way. Not good for anybody in this nation at this point.
4) America will always be here, but like the Soviets, our nation may be called something else in a decade.
5) Form social groups in your neighborhood now. We all certainly must help one another and we did this. You would be surprised at the gifts of luxuries one has (fresh blueberries in my yard and neighbor has a great bottle of Scotch we drink up together!). Also, people DID get rich in the Great Depression, bright people meeting once a week figure much out in a short time and pool resources to launch businesses in necessities people will still buy.
6) June 2007 I calculated deflation to 80% over a four year period. That is a depression. Someone else noticed that the POWER has shifted from West to East. Your are correct sir! The West will regain the advantage for a short time, but keep in mind: We are indeed at the End of Ages. What does this mean? It means we are at one last point in history where the last great friction or world war shall occur to reach global concensus. 10,000 years of history from tribes warring to creating cities, to city-state wars, to countries being formed to blocks of countries warring such as WWI and WWII. Now, down to West and East. Each progression has brought longer periods of peace, but each struggle gotten bigger and bigger. Such will be the case of this last struggle.
7) Russia and GCC will be the temporary world monetary anchor when the U.S. dollar collapses. That this anchor is hostile in general to the West is no surprise to anyone and nor should it be a surprise if this anchor forces that 'mark of the beast' scenerio. I have a deep relationship with God. Keep two things in mind: One, mankind has free will, God is not some monarch that just waits around to punish the wicked and bless the good. Two, divine intervention occurs so we make it past the final war without completely annihalating all of manking. However, expect man to do almost all of the heavy lifting, good vs. evil.
8) After this final war, 1,000 years of peace with technology accelerating so we A) Beat death in the physical form. B) Evolve into energy, with our consciesness being able to be replicated, inserted into a proton and beamed hundreds of times the speed of light in exploration of the universe and back in the same second it was projected. So on one hand, yes it will get bad but keep in mind, the Speakeasy generation in the Roaring Twenties (much like our current culture of corrupt politicians, central bankers and partying citizens) became the Greatest Generation by 1946.

Live in faith, not in fear. We are all destined to meet our death in this generation because we don't yet have the technology to beat it. Therefore, this is the most exciting yet dangerous time in history. Your decendants will be calling us in the USA the second Greatest Generation. There is always a dawn after the dark night!!!! God bless you all!

2008 Jul 21 12:45 PM

[Calvin C.:]

Me. Stanberry,
I urge you to send this article in letter form to every senator & congressmen with scenario #1 in highlight. I will copy this article & do the same. I encourage every reader to do so as well. We need this ASAP!

2008 Jul 21 03:33 PM

[Rokjok777:]

My favorite quote was by a Saudi oil minister: "remember, the Stone Age didn't end because they ran out of stones..."
So the oil age will not end because oil is all used up and goes to $300/500/1000 per barrel.
Prices above $100 make all sorts of alternatives economical, and once we transition to cheaper energy we can resume our growth curve....

2008 Jul 21 05:36 PM

[Old Wizard:]

Many of the gloom and doom scenarios come from many of our mass media outlets. CNBC has been sounding the alarm over Freddie Mac and Fannie Mae, day in and day out. More than once has an anchor or a regular staffer talked with convinction about the real potential of these two organizations going belly up or needing a gigantic Gov. bailout. It would seem to me that responsible reporting of the above facts. should be a prerequisite for anyone on this very widely viewed channel. Everyone should know that if there is a run on any banking or mortgage company by depositors/investors that the institution could go under. Why are main media outlets' reporting fueling the kind of speculation that will encourage such runs?

2008 Jul 21 06:26 PM

[Threshold!!!:]

Richard Neva,

Perhaps you should watch this video below (parts 1-3)

Here is your comment:

"Buy gold and silver, hmmmm. That fell with a thud on my hard of hearing ears. I am so far in debt I can't buy food! My car sits in the driveway, I can't leave home. I am supposed to buy gold and silver? I sold two gold wedding bands from my failed relationships for a hundred worthless dollars and that was good. Give me break, give me a Marxist Revolution will you please and dump this demonic capitalism we seem tied too. It has proven worldwide to be a failure!"


video.google.ca/videop...

2008 Jul 21 08:17 PM

[Threshold!!!:]

Great article. Stacking Silver Maples and have beat all equity markets since the commodities cycle began shortly after the 2001 crash. Buying on the dips and holding through the peaks. I find the valleys are much easier to call than the peaks, especially as the mania escalates.

Also agree with many of the comments, which are obviously from students of world history. If you are scared that big brother will confiscate your physical bullion perhaps you should buy super cheap producing junior mining shares and have the certificates sent to you as Jim Sinclair has suggested.

Regarding real estate I think foreclosures will escalate more than the depression. Seeing as the majority of an American's net worth is tied up in real estate equity, the resulting crash in prices (as explained by the author of article) will devastate the majority of the middle class and eliminate plan c second mortgage option to pay off first mortgage and plasma tv etc credit card bill.

A purge is near, excesses will cleansed and wealth will be transferred once again to the smart/fast money. Let's hope you're fast enough!

2008 Jul 21 08:38 PM

[gregor:]

While the markets are bad your scenario takes into account that all mortgages would fail.. If that would really happen even uncle sam could not help any longer.. I think a scenario whereby 10% of all loans would fail is already bleak and should be taken to calculate the impact on the financial industry...

2008 Jul 22 12:20 AM

[antifiat:]

Yes you can't eat silver or gold bullion, but you can use them to buy goods in short supply or under the counter if there is hyperinflation. You can also protect your wealth from inflation and convert to fiat money as required in order to buy food.

2008 Jul 22 07:58 AM

[WhatAreYou:]

Like sheep herded to the slaughter. All of this was planned years ago as you people bwere led to believe democracy without (even still) knowing what it is and the very fact that you -did- live in a republic .. of the people, for the people, by the people. Today every one of you are slaves to the corporate state. Democracy in it's real form. Make your temporary profits. It's all being logged (with your full compliance) to big brother. Face it, you walked, even sauntered into the belly of the beast with all your 'stuff' of delusional success that broke or was outdated loing before you had paid it off to China and the globalists. Burp. When you do finally wake up to the reality of bush's real conspiracy on -you-, their plan says it will be too late.

2008 Jul 22 01:39 PM

[User 230909:]

"Hospitals and doctors immediately drop their fees to meet the affordability requirements of a free market."
LOL ! No they don't ! Because then they would have to drop their fees to nearly nothing. They would do just like African or Indian doctors, they would trade their skills in a richer country. Meanwhile US mortality rate would shoot up. Can you imagine another epidemic like AIDS with no health care system to speak of ?

2008 Jul 22 05:54 PM

[montyman:]

Yes I understand that Fannie and Freddie shareholders will be wiped out, but what I would like to know is the timing for this. In other words, will we know the status of shareholders quickly, or might this issue drag on for months as it is contended? Thanks to anyone who can answer this.

2008 Jul 23 12:09 AM

[Bullionman:]

Err - yes Housing finally affordable to millions - however those millions are now unemployed.....i have never been to the US but people always tell me how shocking the homeless problem is there.....homeless people everywhere.....wow....... think it is going to get alot more crowded on homeless street.....

2008 Jul 23 02:31 AM

[Old Wizard:]

Bullionman, You should come to USA and see for yourself rather than believe all the bashers of the country. Over the last 10 years we've absorbed close to 1.2 million illegal immigrants/yr from latin america. If there are so many homeless on the streets, why do you think so many are risking everything to get in the country? You should look at Denmark, which prides itself on having no homeless on the street, but when Muslim immigrants reached 5% of the population, they closed the border. Illegal immigrants are now estimated to be close to 10% of our population and very few of these folks are homeless. Homelessness has less to do with imposed poverty and more to do with other factors. I, for one, after completing a trip through Northern Europe, am getting tired of hearing about how wonderful places these are, which have such low population density, largely homogenious ethnic population and have been recued by our money and the lives of many of our young twice in the 20th century and still live in the security blanket that this country provides them.

2008 Jul 23 11:44 AM

[lex:]

where is the New Zealand immigration office................... might need to take a boat there...coz US$250/oil will ground all the planes.

2008 Jul 23 12:39 PM

[montyman:]

testing

2008 Jul 23 12:55 PM

[the wizard:]

I am going out to pan for GOLD.

2008 Jul 23 04:38 PM

[kitkat:]

You can be angry about all the give aways and bailouts till you are
blue in the face. Financials and banks have been on a gambling binge
and the CEO's have rewarded themselves with hundreds of millions in
salaries. Then comes the Senate, Congress, Bernake and Paulson and bailed these gamblers out with taxpayers money. But don't complain. Organize!

First Lobby for Senator's and Congressman's term limits. Have a tea
party and march on Washington. Insist that they don't give away
your hard earned money. Unless we act we will have the greatest
give away by the government to all these billionaire crybabies on
Wall Street.

2008 Jul 24 01:02 PM

[Old Wizard:]

Kitkat, you have a very good point on the term limits for Congress. Seems like all that they arei interested in is raising money for the next election. As a test ask your local Congressman how many of the bills he voted for that he actually read. The money raising also brings influence and access as its inevitable by-product. The problem I see in letting many of these institutions fail is that the middle class and to a lesser extent those struggling to get there will be adversely affected to a much larger degree than any of the heads of the financial institutions in question who are most likely very wealthy and adept enough to protect that wealth through the current crisis.

2008 Jul 24 09:29 PM

[Tauremini:]

**IN RESPONSE TO**
"As long as the US has the strongest military the world has ever known, strategic conflicts will be created, the dollar will remain the reserve currency, because the toughest kid on the block takes your lunch money at will. Until a viable alternative is created,the world turns on oil, who ever controls the oil, controls the game, The US has placed a strategic base in the middle East to control that oil, its that simple"
**********************...
If only that were the case for you guys.

Sadly, irrespective of how strong the military is or how much oil you have, or how much you threaten, boast or reassure, one irrefutable fact remains. All that is absolutely nothing.
You have no money to fight your wars. You have no value in your dollar to be economically persuasive. Other nations would not take a bankrupt nation seriously. As long as the US owes 5 times its own GDP in debt, and as long as China has the ability to dump enough US Treasury Bonds to hammer the final nail in the proverbial US economic coffin, it doesn't matter what the US cares to do.
The last country (Nazi Germany) that went bankrupt and tried to bully its way back into prosperity met quite a dismal end.

2008 Jul 25 01:58 AM

[johngonole:]

Buillion man the homeless are only really seen in the great cities of liberalism where the homeless flock because of all the hand outs. Anyone who wants a job here can get one hence the massive immigration.

My comments on the article is that his description of causes and outcomes are probably spot on. However I think it will be a very slow bleed downward as it has been. So I'm not sure the dollar as the world's currency researve will go away. Rather those who hold dollars will slowly buy up our largest corporations. So are things getting worse... yes. Will they get worse without the desribed free market solutions above Yes but I don't see an end of the world scenario.

I was quite the skeptic of NewWorld order one world government but now it seems very plausible in the form of a one world fascist government. Large global corporation and other international banking conglomerates already control most of the political parties via funding and the political parties have written laws making in very hard for third and fourth parties to suceed. They have effectively created politcal duopolies that are funded by business that contribute to both sides to protect the order. In the US third parties can't even get their candidates into the public debates unless they poll something like 15% in the public polls. Who controls the polls? GE, DIS, and other media giants control the 15% and who gets to be heard. Its all fascism. Its never a failure of government or regulation but always a failure of markets. Markets simply reflect economic realities. Markets don't fail they simply describe the reality. When markets are artificially controlled you get resource misallocations and hence bad investments, shortages, surpluses, coruption, war, etc..

Congress has an approval rating of like less than 15% and still no viable third party can be heard. I think I've described above why. So as creeping socialism/fascism increases so will poverty, unemployment (measured by real output...being paid to hold a shovel doesn't count), theft, wealth concentrations, etc..

2008 Jul 25 02:56 AM

[johngonole:]

Taureimini

Your thoughts are somewhat correct. But the US hasn't even plundered other nations through all of the conflicts we've been in. If the US were to actually plunder in conquest it would have plenty of money to do so for quite some time. See British Empire, Soviet Union, etc...

US without plunder can't maintain a global militarism forever this is true. I don't think the American people believe in plunder so I expect the US to start letting the Europeans solve their own problems for a change. If the US builds out its energy infrastructure in all forms we could actual move back to a foreign policy the founders envisioned. At this point we'd be able to let the Europeans fight it out.

China's control over the US is way overblown. They could force our government to balance its budget via the dumping. They could also spend the dollars they have and hence stimulate our economy perhaps even causing massive inflation but of the better kind. Anyway the real strategy they employ is to control us through debt and then wait wait wait till they can buy up everything on the cheap. Of course that is why I would advocate energy independence and a balance budget. If the US government would balance the budget who real cares what the market value of US treasury bonds becomes.

2008 Jul 25 03:06 AM

[pathwhisperer:]

Ah, we're all paying the price for cause-and-effect disordered sociopaths being allowed complete freedom of action (including taking over the regulatory agencies and buying whore politicians).

"If a company asked to be chartered (incorporated) so it could run a business with a printing press and print more dollars, it would not be allowed. Such a business would add nothing to an economy. Well, how about speculative bubbles and runaway speculators? What’s the difference? There is no such thing as a bubble economy, kept afloat by inflating one bubble after another. Sociopaths cannot understand this, adult cause and effect are beyond them."
pathwhisperer.wordpres.../

2008 Jul 30 01:17 PM

[JoefrmSeattle:]

I know mortgage bond investors are banking on interest rates of ARMs resetting at higher rates but it seems to me this whole forclosure problem could be mitigated by the financial institutions themselves extending the terms of the loans out a few years. ARM extensions could be distributed and graduated out to minimize the risk of exposure to defaulted loans.

This action could be self regulated or government regulated. The bond investors may see lower yields, banks might make slightly less but all would continue to profit. Foreclosure rates would fall dramatically. Business models would stabalize. The government (the people) would not need to save anyone. The entire economy would recover.

Fractional reserve lending laws permit banks to loan out 10 times the value of their reserves. This means if mortgage interest rates are 6% then their actual profit is 60%. That is an extremely good return and does not include other ways they profit. This economy is being crushed by entities who are capable of fixing it with a stroke of their pen remaining extremely profitable in the process.

So why not do it. Why not extend out the terms of these loans in facing default or foreclosure because if interest rate adjustments. Auctioning homes for less than they are worth can not be good business. Being bankrupted, bought out, bailed out or federalized do not seem like a better options to me.

Please, tell me what is wrong with this solution and why no one talks about it.

2008 Aug 19 05:42 PM

[Founding Fa...:]

Richard Neva I suggest you pick up a copy of "The Road to Serfdom" by F.A Hayek. Socialism, along with fiat currency, are major contributors to the situation at hand. Centralized power and "planned economies" are the things of despots, I hope for your sake we get an Augustus and not a Nero.

I am glad however, that many of the other comments on this board seem to reflect a sound understanding of history and our corrupt system. It is good to see that most of us are not "reactionary" but more thoughtful in our approach. We certainly should not seek the largest nipple to nurse from like Richard Neva suggest. Let the markets work and to those that are financially incompetent then let them take accountability.

2008 Sep 07 05:05 PM

[Don77:]

Is the term bonds and shareholders one in the same, concerning Fanny Mae securities. I bought, thinking I was buying bonds, with a quarterly interest return as part of my retirement plan.

If the Fannie Mae "bonds" are guaranteed by the US Government, is the government not going to back these "bonds?" If not, how will Fannie Mae ever expect to attact future investors?

2008 Dec 03 11:57 AM