February 06, 2004


Today is Axel Rose's birthday. He's 42. Happy Birthday Axel. Also Happy Birthday to the Gipper, who at 93, ads a year to his record as the longest living U.S. President. We'll forgive Reagan today for marrying conservatives to deficit spending. We choose to remember for any number of quotes about limited government, including this one, "The kind of government that is strong enough to give you everything you need is also strong enough to take away everything that you have." I mention Axel, however, because a couple of young French acoustic guitar players were rocking out to an old Guns N' Roses song last night. I was enjoying a post-blogging beer last night when they belted it "Patience" (Said woman take it slow/ things will be just fine/ you and I'll just use a little patience). The Fed, for its part, got more reason to be patient today. The BLS released the January employment numbers today and although un-employment declined, it declined less than "expected." The bond market welcomed this news. It means the Fed will be "patient" in raising rates. In other words, if the Fed's waiting for employment to pick up before it raises rates, it's going to be waiting for awhile. Housing Update Fannie and Freddie--renegade credit creators and systemic risks to the financial economy--got two shots fired across their bow this week. First, the Office of Federal Housing Enterprise Oversight (OFHEO) imposed Freddie with the maximum capital surcharge available under law. The company has to hold 30% more capital than currently required. OFHEO is also requiring the company to get pre-approval for certain transactions until executives bring Freddie's financial statements up-to-date--or report them, for that matter. This is just the first step it getting the GSEs to slow down the pace at which they've been expanding their balance sheets. Congress, the Fed, OFHEO, the President...everyone in Washington is starting to realize what a monster Fannie and Freddie have become. They've issued trillion in bonds to buy up mortgages. But in reality, the asset side of their balance sheet is made up of millions of mortgages...which could easily go into default if rates rise. The GSEs are on the hook to bondholders...and their main source of income is in jeopardy in a rising rate environment. And today, the WSJ reported that: "The Fed plans to change the way Fannie, Freddie and their sister government-sponsored enterprises pay holders of their debt securities. The Fed acts as the GSEs' transfer agent for the payments. On days when the payments are due, the Fed makes the payments for the companies around 9:15 a.m., although the GSEs don't need to repay the Fed until around 6 p.m. Essentially the Fed has been giving the GSEs and a few other entities, such as the World Bank, interest-free loans for as long as nine hours on total bond payments of as much as $145 billion a day." Economically, it's not going to change things overnight. And in a strange way, it's encouraging that regulators are getting on the case...trying to prevent the systemic domino defaulting the OFHEO outlined in the report in produced last year (and which was the basis of MY report on housing). But this is shutting the proverbial barn door after the proverbial horse has left, proverbially. Non-proverbially, the slow-boiling rise in rates might allow the GSEs to prepare for a bigger shock down the road. And in the interim, that will probably take some pressure off Fannie Mae (FNM). However, the strange truth of the financial economy in America is that it's built on the backs of homeowners. It's built on debt. And more acutely, the ability of individual Americans to make a monthly mortgage payment is now a critical issue to the owners of trillions of Fannie and Freddie issued or guaranteed bonds.


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