There will very likely be other unpleasant surprises in store for investors with Freddie Mac as the economy moves deeper into a nasty recession. Losses in their portfolio will turn out to be much larger than currently reported. The recent increase in the size of loans that they can back will in the end add to their losses.
Freddie Mac has probably already cooked their books to try and hide huge losses in their mortgage portfolio. At some point these undesirable accounting practices will come into public view.
As the housing crisis deepens financial stocks in general will remain under pressure for all of 2008, perhaps much longer.
While the perhaps heroic, certainly desperate actions of Ben Bernanke and the Federal Reserve bank have brought some relief to the Wall Street investment banks, commercial banks, and mortgage companies look for the relief to be very short lived.
In my opinion, the problems with the world's financial system, with the United States in the lead position, are just far greater than the solutions. In the end we will be lucky to avoid a financial meltdown.
The desperate nature of the Fed's recent actions should give us an idea as how close to the financial abbess we truly are. Exchanging government treasuries for toxic waste mostly worthless subprime mortgage and CDO paper and the like seems to be a bad exchange to me.
Cutting rates at a time when inflation is picking up and the dollar is in a strong downtrend risks a unhealthy dose of inflation, perhaps even hyperinflation, as consequences of that interest rate cutting action.
Bernanke's high level of activity (interference?) in the way a capitalist economy is supposed to work may well prove to be a disaster as events unfold. At some point the risk is high that he will make a tragic mistake. Perhaps he already has as the Bear Stearns bailout has enraged Bear Stearns investors and already the Fed is backpedaling as the $2.00 a share price paid by JP Morgan, demanded by the Fed, is already subject to negotiation.
It is the trillions of dollars of hard to value, probably largely worthless, derivatives that threatens the world banking system. The likelihood of further serious problems, perhaps the failure of a few big banks, brought about as the derivatives market falls apart, is high.
I would sell the recent run up in the financial sector stocks.
$32.49 (03/24/08)
