Who’s Really Getting Bailed Out Here

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Includes: FMCC, FNMA
by: Greg Newton

This is not exactly new news for anybody following the plot, but a Deutsche Bank (NYSE:DB) report that fluttered uninvited into NakedShorts’ inbox over the weekend — danke, David S. Products — put some numbers on just why Uncle Sam Hank ain’t gonna let the GSEs' debt go bad, no way, no how.

DB_Table4

...the biggest holders of US agency securities are countries with some of the largest current account surpluses vis-à-vis the US...

The Cayman Islands? Aaahhh, yes. More precisely, Hedgefundistan, doubtless bolstered by the odd petrodollar or two. For those uncomfortable with large numbers, the $3.15 trillion total is a mere 420 Kerviels®, give or take.

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Not content with undermining the US economy by taking our chitties in return for the carp piled high at Wal-Mart and Bed, Bath and Beyond, and the fake leather upholstery option in the Escalade that seemed such a great deal with gas at $2.50 before the bank pulled the HELOC, they enabled the housing bubble. The kindness of strangers, a beautiful, beautiful thing.

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But Hedgefundistan is, predictably, not keeping up its end of the bargain.

As of June 30, 2007 hedge funds and other investors operating through the Cayman Islands held a significant share of agency bonds. After the crisis started in August 2007 the hedge funds have been significant sellers of agency debt, whereas the emerging market countries (sic) have continued buying.

Bottom line:

We estimate that unless the GSEs are able to make a significant bounceback and raise substantial new capital, as much as USD10bn could be needed to facilitate expansion of the mortgage market at a minimally desirable pace over the year ahead, and another USD30bn could be needed to reserve against rising losses ahead.

And don’t go looking for any help from Kuwait.

NakedShorts is regrettably unable to pass along the complete report; investment bankers tend to take a dim view of that sort of thing, sponsoring as they do a veritable Wehrmacht of attorneys to shout “copyright” and “violation” and “misappropriation” and other dire prophecies. But your friendly DB prime broker and/or structured products salesman will almost certainly do the decent thing.

Fannie, Freddie, Sheila and Hank
Global Economic Perspectives
Deutsche Bank Securities Inc
Jul. 21 2008