Saturday, September 6, 2008

A bailout shoud put a floor under housing values

All the leaks say a bailout of Fannie and Freddie is imminent. The majority of speculation affirms the Treasury’s assumption of GSE debt [ a no-brainer ], plus the leaving of preferreds protected while diluting the common with the new government equity. The common should be wiped out. I can’t find any difference between FNM common and Continental Illinois or IndyMac common. Those holders bet wrong and they should lose, not just lose almost all. The Preferreds should lose also, even if it hurts financial institutions that were allowed to use those shares as regulatory capital. But I guess that would be embarassing and inconvenient. So our leaders will say that those investments are good with a waive of the wand.

Is this rescue wise? Who knows? They don’t ask Crusty and without my Carnac turban on I can’t divine the future. It certainly pushes gazillions more obligations out to the future along with medicare, social security, and the normal treasury obligations. We had better remain the world’s financial bastion.

But a rescue may help NCC. I don’t think it will help the market in general, the remainder of 2008, as I don’t believe a housing bottom will take hold that quickly and, even if it did, and it can’t compensate for the tax loss selling and Obama selling that will accelerate as we head toward year end. Any rally will be sold into to harvest losses and current long term capital gain rates. But a slowing of the decline in real estate values increases the probability that NCC’s loan loss reserves are adequate and it’s capital sufficient.

The bailout will stop the foreclosure bandwagon on guaranteed loans as the new GSEs will restructure the individual loans to a level that the borrower can pay, honor the guarantee to the bondholder, and stuff the taxpayer, down the road, with the shortage. The avoided foreclosures will slow the amount of foreclosed homes on the market and start to stabilize prices. Non guaranteed homes will still be foreclosed, as will HELOCS, but the numbers will become more manageable. If the national builders don’t go bullistic, and it is up to the banks and wall street to monitor them, home inventory should start to lessen and prices stay at present levels.

Falling prices are the HELOCs worst nightmare and NCC has a boatload of home equity loans. Their subprime and builder loans are less of a problem. The HELOC book is the dangerous one and the main reason they have set aside so many reserves. If home values stabilize it gives NCC a chance to get out of lots of their bad deals with smaller losses vs complete losses if prices were to continue to decline.

So here is the new plan based upon the upcoming GSE bailout. I will make lots of money on NCC and hold the stock until a future Congress again lowers the capital gains rate and death tax which will allow my family to move to New Zealand and avoid the financial reconing that has to eventually be faced in the USA. I hope my kids like lamb.

Different subject, but I’m amazed how well SMBL has behaved this past week in face of the market’s turbulence. I don’t know what that means, but I think I will slather some on a piece of rye bread and make me a sandwich and go watch some football.

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