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Don’t be fooled by global stock stumble

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Don’t blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it’s only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

from Rolfe Winkler:

Behind Freddie’s “profit,” rising NPAs

Late yesterday Freddie Mac surprised markets by reporting a profit and by not requesting additional bailout money from Treasury.  Before we celebrate, however, let's consider a few revealing footnotes from the company's quarterly filing.  But first, some key financial ratios.

As you can see, non-performing assets are still rising quickly.  (Click table to enlarge in new window)

Freddie in the black, Treasury off the hook

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Freddie Mac reports that it managed an actual net income gain in second quarter of $768 billion – a big turnaround from the $9.9 billion loss in the prior quarter. That means Treasury is off the hook, at least in this quarter, in terms of giving Freddie more money through its $200 bln equity line.

This contrasts with Fannie, which needed to take another gulp from the Treasury spigot. See more on the sinkhole here.

It’s August. Do you know where Fannie and Freddie are?

Fannie and Freddie’s regulator-in-chief James Lockhart is stepping down to spend more time with his family, Reuters reports. Can’t say I blame him. He’s been at the helm of the Federal Housing Finance Agency, formerly known as OFHEO, for three years, saw through an unprecedented de facto nationalization of the companies, and still the future of the housing finance giants remains nearly as uncertain as it did a year ago.

Will the government wind them down, will they return them to the private sector, will they stop propping up the debt markets where they operate? There’s plenty of question marks – some might say too many considering the pivotal role these companies play in the U.S. housing market. Much of the game plan set forth when the government took over Frannie nearly a year ago expires at the end of the year, making all this uncertainty doubly worrying.

The government owns the MBS market

OK, it’s not a majority owner, but the government has an impressive stake in the $4.5 trillion agency mortgage-backed securities market.  Barclays Capital’s last count, as of July 3, puts Federal Reserve purchases at $621.6 billion since it launched the program in January.  Separately, the Treasury Department has picked up more than $145 billion since the government put Fannie Mae and Freddie Mac in receivership in September. The Treasury data is through the end of May.

The Federal Reserve has pledged to buy up to $1.25 trillion of mortgage bonds guaranteed by Fannie and Freddie and $200 billion of agency debt by year end.

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