Hank's Bazooka

by Larry Levin


On July 13th, 2008, before the Senate Banking Committee, Treasury Secretary Hank Paulson was telling lawmakers that he was going to rescue Fannie Mae and Freddie Mac whenever he felt necessary, as long as Congress gave him a blank check. When asked why he needed a blank check and not a specific amount, Mr. Paulson said - If you've got a squirt gun in your pocket, you probably will have to take it out. If you have a bazooka in your pocket and people know it, you probably won't have to take it out. By having something that is unspecified, it will increase confidence, and by increasing confidence it will greatly reduce the likelihood it will ever be used. He was daring short-sellers to stay short FNM and FRE. He was also telling those who feared getting long that all was fine; he had a weapon and was ready to fire.

The problem is, however, the market didn't listen. Hank was surely thinking today - Hey, I said I have a bazooka in my pocket. Didn't you hear me? The market responded, Naaaaah, it's more like a pop gun. Now sit down before you hurt yourself. When Hank fired his bazooka over the weekend, we found out that it was loaded with confetti and a flag that read BOOM! FNM and FRE are bankrupt with their stock prices are now down 99% - so much for the bazooka.

The S&P500 lost more than 100% of yesterday's rally. If defined by today's massive reversal, the biggest bailout in the history of the US may be a bust. At the close, the S&P500 had been slammed 3.41% lower.

Investors are getting defensive, bracing for further economic erosion, said Jack Ablin, Chief Investment Officer, Harris Private Bank. The bailout of Fannie Mae and Freddie Mac is - A step, but it's not the answer to all our prayers. It helps position us for the future but doesn't solve our current troubles.

Treasury Secretary Paulson claims that his goal is to stabilize the mortgage market. But the best way to do so would be to allow housing prices to fall to their own level. Let the market decide. As long as home prices remain artificially high, as Paulson is attempting to do, the risks of mortgage lending will keep credit tight, and the high costs of mortgage payments will keep potential buyers on the side-lines. The hope is that the new government lending will prevent home prices from falling further, but I'm not sure it will work.

In order to preserve current home prices, the government will be forced to maintain the lax lending standards that got us into this mess in the first place. Even though Representative Barney Frank said on CNBC today that many people who bought homes shouldn't have been allowed to, do you really think that will change? Rep. Frank was surprisingly condemning not the banks, but Congress' insistence that more and more loans be made to lower and lower credit-quality individuals. You see, Congress wanted to go back home to their slack-jawed voting constituencies and show them how they brought home the PORK - in the form of easy money from Fannie & Freddie, which was actually the Treasury all along.

By the way, was any of this Constitutional? And will the future of this new monster be run with Post Office-like efficiency? You betcha!

WaMu and LEH will be on the radar tomorrow folks. Lehman Brothers and Washington Mutual are the next candidates for implosion and Federal Reserve or Treasury bailouts. Today LEH was crushed 44.9% while WM was down 19.90%. New news this evening: Standard & Poor's Ratings Services late Tuesday said it lowered the outlook on Washington Mutual Inc. and Washington Mutual Bank to negative from stable. At the same time, it affirmed the BBB- long-term and A-3 short-term counterparty credit ratings on WaMu and the BBB long-term and A-2 short-term counterparty credit ratings on Washington Mutual Bank. The outlook revision reflects the increasingly challenging housing and mortgage markets and their impact on WaMu's core mortgage franchise, said Victoria Wagner, an S&P credit analyst, in a statement.

Will LEH and WM be bailed out too? Or will Congress say - ENOUGH! In my opinion, if Congress had a bazooka, it too would be loaded with confetti and a BOOM flag. Then again, one could argue it's a real bazooka with genuine ordnance - but it's aimed at the taxpayer.

Real Time Trading Signals*for

Trade Date: 9/9/08

E-Mini S&P Trades*
(before fees and commissions):

1) VA buy @ 9:40am at 1255.50 = -1.75 (1 lot)

2) OTF sell @ 10:30am at 1253.75 = +3.50 (1 lot)

3) TP sell @ 11:25am at 1249.25 = -2.00 (1 lot)

4) Algorithm positions (4)...combined total...+2.25

ZB (30 Year Bond) Trades*
(before fees and commissions):

1) Buy @ 7:22am at 119.006 = +6.0 & +7.5...combined total...+13.5


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