"Gummint... Guarantee Freddie and Fannies's debts or the market will keep going down"... In other words... make greedy and reckless investors whole at the expense of tax payers.. Will it become a daily rant?
Not that I give Jim much thought...but I don't understand his logic on this one. Somehow, "inside manipulators" (not the broader market) short-sold FreddyMac down the toilet - unjustly, he adds. And that free-market collapse destroys confidence in US Equities because our Regulators didn't stop the market from operating, well, freely. Sort of like Bear Sterns --- Evil manipulators commandeered tens of billions of stock and pummeled an otherwise buoyant Investment Bank into the ground... I guess Cramers version of free-markets is Government Bailouts to any large-cap blue-chip to "shore-up confidence in the NYSE".
I'm rooting for FRE to get bailed out myself. I got in at 2.70. It's basically an option betting that the current situation will make sure the government bails them out. I believe these babies will be in the 20's within 6-12 months. They're not going to let them fail. Come on, if they fail, the whole mortgage market will collapse. This is not the time to implement actions against moral hazard. They will do that once the crisis has abated. As for now, they're giving away free money. Don't let the media propaganda fool you out of some free dough.
They can be prevented from failing in a scenario where equity is written down to $0.01*. *entire market cap, not per share.
I think what they will have to do is recapitalize by selling shares to the Treasury. This will prevent some contagion that will occur if they issue preferreds or go explicit on the debt. After that they will most likely be broken up into regional units. So just one big bailout via the tax payer beause the infusion will need to be large enough to reassure the market. If you look at who are the most important holders of fannie and fredie securities in order of importance it goes debt holders/ preffered holders/ shareholders. Hell NLY has about the same market cap as both combined.
Don't forget lobbying power of entities/holders in determining order of preference in terms of the solution.