GSE Bailout: More Losses to Come

Without even looking, I already know that 2 out of 3 articles on most financial blogs are on the bailout of Fannie (FNM) and Freddie (FRE). And I'm willing to bet it will dominate headlines for months to come. So I'll try to make a few insightful comments to avoid the repetitious posts that are no doubt all over the web. You might also want to check my archives for the pieces I wrote on Freddie and IndyMac a couple of months ago.

If they were "too big to fail" as Paulson, Bush, Bernanke and other cronies insist, why were they allowed to operate with exemptions from the SEC Acts of 1933 and 1934? If they were "too big to fail" why didn't Washington remove Franklin Raines and take over the GSEs in 2004 after the accounting fraud was detected? If they were "too big to fail" why were they transformed into shareholder firms with virtually no regulation, no accountability, severe undercapitalization requirements, no transparency and allowed to act irresponsibly? Doesn't government backing also come with accountability?

Staggering Losses to Come

Anyone who believes the losses from Fannie and Freddie will be limited to Washington's $25 billion figure are naïve. Yea, keep believing the same lying fools who have done nothing but mislead you throughout this entire crisis. I'm confident the losses will be at minimum $100 billion, and possibly $200 billion. But I wouldn't be surprised if they totaled $500 billion. How did I come up with these numbers? Using similar techniques to forecast a 30% to 40% correction in oil when it spiked to $147. If you really want to know, email me and I'll tell you.

More Lies from Bush

President Bush told Americans this bailout would ensure a more stable housing market for Americans. What he didn't say was the obvious….it isn't going to help current homeowners. This record-setting bailout only works to refuel America's swollen credit bubble. And in the process, it only helps the banks. If taxpayers are going to fit the bill for this mess, don't you think all executives from Fannie and Freddie from the past 8 years should be forced to return all compensation they received? If they don't think that is fair, ask them what they think about a 10-year prison sentence.

Short-term Effects

In the short-term, mortgage rates will drop since credit risk has eased at least for now. In addition, the dollar will rise (as long as no new banking concerns surface) while gold and oil will fall (independent of any weather related damage in the Gulf or announcements by OPEC to cut production). But the problem isn't so much that consumers can't find good mortgage rates. Rates have been very low for many years. The real problem is trying to convince people to buy homes as prices continue to fall while inflation soars. The idiots in Washington seem to think we can consume our way out of this mess and they will be proven wrong…again.

So forget Fannie and Freddie for now. It was obvious a bailout was in the cards. It's a played-out soap opera for now. If it wasn't obvious to you for months what would happen, you might consider changing who you listen to for insight. I won't waste any more time dealing with this issue until after November, when the ultimate direction of the GSEs has been determined by the next president. And if you think the bailout will give the stock market a permanent boost you should apply for a spot on CNBC because it appears as if they can more easily carry out their agendas by hiring those who have no idea what's going on. We are just now in the early stages of the de-levering process. And it's going to get really nasty, not just in the US, but around the globe. America's Financial Apocalypse is about to extend into the Global Financial Apocalypse.

Stock position: None.