"Size 16, Triple E"

Latest (and Biggest) Shoe Drops
in Housing, Credit Market Mess

The good news is, there don't appear to be any more shoes to drop in the seemingly never-ending housing downturn/credit crisis (at least for now). The bad news is, the one that just did -- Fannie Mae and Freddie Mac's stock market collapse this past week -- is a size 16, Triple EEE.

To re-cap, the crisis began in earnest last Summer when all the subprime lenders seemed to simultaneously lose their short-term funding from Wall Street. That set in motion a domino effect that crippled or bankrupted the subprime lenders, and culminated with the collapse of Bear Stearns last March.

Along the way, Wall Street and big banks have collectively written off almost $400 billion in losses.

After Bear Stearns, the crisis seemed to abate for two months, only to return with a vengeance in May when Lehman Brothers' downward spiral started to accelerate. Now, the credit crisis suddenly appears poised to claim by far its two biggest victims yet: Fannie Mae and Freddie Mac

In a year, the two stocks have each dropped more than 70%. A big chunk of that drop came just last week. Shareholders have seen more than $100 billion in market value go "poof."

The significance of these two entities to the housing industry and broader economy can hardly be overstated. Together they own or guaranty more than $5 trillion in mortgages -- half of all outstanding U.S. mortgages. According to one analyst, Fannie Mae and Freddie Mac are "wholesalers supplying a retail store: the retail store is a bank selling money." (See, "How Fallout Could Affect Main Street; The New York Times, 7/12/08). Here's the link:

http://www.nytimes.com/2008/07/12/business/smallbusiness/12money.html?ref=business

If the wholesalers' shelves go bare -- as seems possible if Fannie Mae and Freddie Mac lose access to the credit markets -- one might expect that the retailers' shelves may thin out, too.

Will the Government put Fannie Mae and Freddie Mac into receivership? Will the Fed open up its discount window and lend directly to them? Will Fannie Mae and Freddie Mac recover on their own? In the words of the old TV series, "Tune in next week -- same Bat-time, same Bat-channel" (er, blog).

P.S.: looking for something upbeat to offset the gloom? The lead story in the current Barron's Magazine -- ever the contrarian -- is "Bottom's Up: This Real-Estate Rout May Be Short-Lived." Click here for the article:

http://online.barrons.com/article/SB121581623724947273.html?mod=9_0031_b_this_weeks_magazine_main.

See my next posting to find out if Barron's is right. Short-term, the main consequence of all the market turmoil is heightened uncertainty. Until the dust settles, expect a lot of people to stay on the (increasingly crowded) sidelines.