| The threat of "financial nationalism" is on the rise as European governments are moving toward guaranteeing all bank deposits in order to prevent the flight of capital from their banks. This is the latest development in what is becoming an increasingly dramatic crisis of confidence in the financial world.
Ireland and Greece were the first to do it a few days ago, but Germany and Denmark, over the weekend, also guaranteed all bank deposits, and the U.K. is starting to feel the pinch, so it's looking for a way to guarantee all bank deposits. According to The U.K.'s Independent: "Gordon Brown is under intense pressure to guarantee all savings in British bank accounts after Germany and Denmark became the latest European countries to make the move."
The Independent also reported that the U.K. government "ready to pump billions of pounds of taxpayers' money into Britain's banks" including the possibility of the governent "buying stakes in a host of banks."
In other words, instead of being contained, the crisis is spreading as the $700 billion bailout plan in the U.S., passed Friday, is raising more doubts than adding a feeling of security and stability to the system. The bottom line is that investors are starting to flee countries that are not guaranteeing deposits or not being seen as making large enough commitments to the protection of investors.
What's missing from the analysis provided by the mainstreammedia is the failure to connect investor fear and governments.
At the center of the whole crisis are two entities Fannie Mae and Freddie Mac, and their relationship to the mortgage markets.
To be sure, Fannie and Freddie are not the sole culprits of this situation. They had lots of help. But their role was central.
According to The New York Times, the decision made by one man, Fannie Mae CEO Daniel Mudd, under pressure from investors and politicians, led to a "tippping point" scenario which precipitated the initial events that got us where we are today.
The Times set the background of the story by noting: "Fannie, a government-sponsored company, had long helped Americans get cheaper home loans by serving as a powerful middleman, buying mortgages from lenders and banks and then holding or reselling them to Wall Street investors. This allowed banks to make even more loans — expanding the pool of homeowners and permitting Fannie to ring up handsome profits along the way."
But by 2004, when Mr. Mudd took over, the company was in trouble, and "under siege" as:
- "Competitors were snatching lucrative parts of its business."
- "Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers," and
- "Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.
Under pressure, according to The New York Times "Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives."
The net results, as the Times puts it, took some time to become clear as "that decision proved profitable." Yet "in the end, it nearly destroyed the company and threatened to drag down the housing market and the economy," while setting the current crisis in motion, given the central role that Fannie played in the mortgage market.
Based on "dozens of interviews most from people who requested anonymity to avoid legal repercussions," The New York Times paints a picture of a man who took a gamble and who even now denies having taken any actions that could have led to the current situation.
Yet, despite his denials, the Times reports that "under pressure from Wall Street firms, Congress and company shareholders, (Mudd) took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink," as "Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data."
One insider told the Times that Fannie Mae "didn’t really know" what it was buying, as the company was designed to buy "plain vanilla" loans but was tring to "push chocolate sundaes through the gears."
Mudd told the Times that his decisions were based on the fact that '“Fannie Mae faced the danger that the market would pass us by. We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”
Conclusion
In today's first installment of "Financial Implosion: How We Got Here" we learned that Fannie Mae's new CEO felt pressured to buy risky loans, despite some in his inner circle not "knowing" what it was that they were buying.
Indeed, it seems as if some of the same Congressmen and Congresswomen that led the fight for and against the bailout, playing politics, and pouring on the pork onto the "bailout" might have been responsible, at least partially for the current situation.
Yet, somehow, they have escaped the consequences of the mess that they contributed to. Certainly we won't know until November, whether they will pay the price.
One thing is certain, it wasn't just Congress. And that's what tomorrow's installment, Part II will cover. | |
 | Market Moves | | S & P SPDR (AMEX: SPY) Looks Headed For New Lows
The S & P SPDR (AMEX: SPY) made a fresh new low on Friday. And early action on Monday suggests that a new low is on the way.
Chart Courtesy of StockCharts.com
As we note in this space often, it's not how they open, but how they close. Still, gapping lower at the open, and picking up steam as the day wears on is rarely the way to start a new week for the stock market.
Sure, there will be short covering rallies along the way. And maybe the market will end up higher on one or more of the major indexes.
But market breadth is deteriorating at a very rapid clip now, and the number of stocks making new 52 week lows is getting no better, despite flashing potentially bullish signs a few days ago.
There is no reason to rush into this market on the long side. And there is reason to be cautious as a short seller as well. For now, cash seems to be the best alternative.
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