S&P slashes Fannie, Freddie preferred stock to junk Sun Sep 7, 2008 1:35pm EDT NEW YORK, Sept 7 (Reuters) - Standard & Poor's on Sunday cut the ratings on Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) preferred stock to junk status after dividends were eliminated in a takeover bu the U.S. government. S&P boosted its outlook on the housing finance companies' "BBB-plus" subordinated debt ratings to positive from negative amid signs interest payments would not be affected. The Treasury is taking an equity stake in the government sponsored enterprises to shore up their financial stability, and placing them under conservatorship to manage their businesses of providing money to the U.S. housing market. The preferred stock ratings dropped to "C" from "BBB-minus," according to the S&P statement. It was the second cut by S&P in less than two weeks. S&P also affirmed the "AAA" senior debt ratings of the GSEs, and cut their risk-to-the-government ratings to "R" from "A-minus," before withdrawing that designation.
Why is this news? The news happened in July when Congress passed the legislation and Bush signed it. I guess the "news" is that F&F were in such bad shape that Paulson has to use the bazooka that he promised he wouldn't need, and he couldn't wait until Oct 1, when the law officially takes effect.
Initially, a positive bump until details are comprehended. Then, I think the U.S. dollar will be negatively impacted (major increase in national debt load), with a correspond uptick in commodities. I don't know what the impact will be on the financial institutions. I still lean shor on this sector but I've been wrong since July 16th.
I view it as bullish for the banks & brokers as a portion of the MBS they have taken write downs on are now made whole. Bullish for the general market as this will be construed as a bottom in the credit crisis. Bullish on commodities as no way the dollar holds up vs. US gov't taking on unknown amounts of debt. I'm all in cash - committing 1/3 to C (I would do LEH instead but the drama there is too much for my stomach), 1/3 to index call options, 1/3 to USO.
I'm worried about catching the caboose of the Financials gravy train. The XLF has been screaming higher! Does anyone else see better pin action off the weak dollar??? Maybe the Metals (XME) and Oil Services (OIH) since the hedge funds seemed to hit a crescendo of puking last week with these sectors ⦠and thereâs IKE etc.
Cool FRE/FNM marks another bottom just like BSC -lol. Lets see what marks the market bottom after that. Every time I hear guys on CNBC saying they think the low of the mkt is in I just know for sure it isn't.
This should tank Treasuries, which should increase mortgage rates. ETA: BTW, why would anyone want to buy treasuries now that agency paper has zero risk? Or will the two trade at the same interest rate now?
First, note that Paulson isn't doing this out of altruism to bail out the troubled lender, nor is it to help those who have actually lost their homes. Paulson's action is, for the most part, governed by the intererst of big investment firms and the sovereign wealth funds that hold a large chunk of bonds in GSEs. But the current economic malaise is no longer centered on the subrime and the credit mess. It's gotten beyond that at this point. With massive layoffs in the offing, consumers will no doubt tighten their belts, which in turn will have dire consequences for Fortune 500 and that alone is enough to create a flu around the globe. I'm not advocating for a doom-and-gloom scenario. This is the reality of what a capitalist-driven business cycle is all about: A bust naturally follows a boom, and vice versa. Trying to alter that natural progression will only make matters worse in my not so humble opinion.