Fannie and Freddie Are Club-ied

Top Line: Some follow-thru to the downside produced a negative day but the overnight futures are still singing a bullish tune. As long as we continue to see dip buyers come in, we won't be at a good intermediate term low. The real trading low will be here in short order but not until the buyers go away, at least at the opening.

The stock market had a number of issues to deal with on Monday. While the real news is the credit market generally, the piece of news that seems most important tonight is the news from Fannie Mae and Freddie Mac. These companies are GSEs, which stands for Government Sponsored Enterprises. How do they compare to Ginnie Mae? This is the news today.

GNMA, called Ginnie Mae, refers to investments or securities that are backed by the "full faith and credit of the US government". These securities have very little risk due to their backing by the government. Fannie and Freddie present a different picture, securities that are Not directly backed by the government. So, GSE is not the same as GNMA, at all, or is it?

Fannie Mae (FNM) and Freddie Mac (FRE) are publicly traded companies and make their money in the mortgage market by "speculating" on some mortgages and by charging fees to others for pooling the mortgages in their name.

Both of these companies, FNM and FRE, are in the center of the mortgage storm with some additional bad press that indicated further losses for them today. Both of them were down about 12% today on that news, down to lows not seen since the mid-90's. These stocks are down 75% plus in the last year alone.

The temporary increase in the "jumbo" loan limit allow these companies to help with any liquidity problems that may be constraining the mortgage market. The companies have had trouble actually calculating their capital, which is small in comparison to their loan portfolios. The idea is that an increase in the limit would allow more, shall we say, convenient loans for this size mortgage.

The real question is if the GSEs get into some trouble that is over their heads, will the government step in to rescue them or bail them out. Maybe that's a question for another day but we are trying to see if the government is willing to start taking over private companies.

We have seen a lot of things happen in these markets but we keep our eyes open to what could be a drain on taxpayers. This may not happen but the threat is now there. We continue to be amazed at how all these things are coming to light in the wake of the "contained" subprime situation.

FSI: 67.04 (ouch, the horsemen were down hard on Monday)

Jackson is here: