Blue Chip Stock Trader

Saving Fannie and Freddie

Due to the peculiarities of securitization, The future cash flow from a lot of their assets is impaired. Practically all of the finance companies and banks that have (over)utilized securitization over the past decade have juiced-up their earnings and frontloaded their gains on the underlying assets at the time that the securitization was transacted. For instance; a par value mortgage (at 100) was "sold" through securitization at 103. The 3% premium is a PV of the future expected cash flow under "normal" conditions. The 3% is received as cash from the investors in the ABS bonds and is booked to P&L and thus Equity at the time of issuance. All the issuers of ABS were juiced by this drug and since the supply (market liquidity and new originations) has dried up they are suffering from withdrawal which absent emergency medical treatment may cause death.

Saving Fannie and Freddie

In the words of my boss: "If you believe in Goldilocks, then you have to believe in The Three Bears."