(More) Hemorrhaging at Fannie Mae, Freddie Mac

Legacy Losses -- or Fresh Red Ink?

If a sweater was 96.5% navy, do you think it would look navy-colored?

And if a chocolate bar was 96.5% dark chocolate, could the manufacturer bill it as dark chocolate?

And if the chance of precipitation was 96.5% . . . would you carry an umbrella?

What's with the inane questions? And the 96.5%?

According to Inside Mortgage Finance, that's the percentage of mortgage loans the government directly or indirectly provided financing for in the first quarter (The New York Times; 5/10/2010).

If housing finance isn't a nationalized industry -- at least temporarily -- I don't know what is.

"Near Collapse"

Based on Fannie Mae and Freddie Mac's recent results, the two companies need another $20 billion or so -- to survive another quarter.

As horrific as that number is, it's actually an improvement from their losses a year before.

What to do?

Some of the answer depends on whether that tidal wave of red ink consists of "legacy" losses -- incurred as real estate fell about 30% nationally the last four years -- or instead reflects ongoing, current losses.

Given Fannie Mae and Freddie Mac's famously bad accounting, no one really knows for sure.

"We Need the Eggs"

For now, the government is clearly consigned to writing that check quarterly.

But how long it can afford to -- or is willing to -- is a big question mark.

The dilemma recalls a scene from an early Woody Allen movie.

One of the characters complains to her friend that she has a crazy uncle who thinks he's a chicken.

"Why don't you send him to a psychiatrist?," the friend asks.

"We need the eggs," she replies.

P.S.: I know where to go to get at least a little of the capital needed to fill the Fannie/Freddie black hole: their former managements. As I recall, Franklin Raines et al walked away with hundreds of millions in pay during the period that these entities' losses were gestating (notwithstanding their Pollyanna financials).

That should make them poster boys for so-called exec pay "clawbacks."

"Bank Runs," Circa 2009

No "Run on the Banks?" Define, "Run"

It's true that depositors haven't raced to withdraw their money from the nation's -- indeed, the world's -- largest, so-called "money-center" banks the last 18 months or so (basically, the ones considered "too-big-to-fail"). That's largely a credit, literally, to deposit insurance -- administered in the U.S. by the FDIC.

However, that doesn't mean there hasn't been a run . . . in the world's stock markets, by (and on) their shareholders.

In a devastating post, "Bank Market Caps, Then & Now," financial blog The Big Picture graphically depicts the collapse in value of the world's 18 largest banks since the second quarter of 2007. The list includes not only such storied names as Citigroup and Bank of America, but the "Citigroup's" and "Bank of America's" of the U.K, Germany, France, and Spain -- international entities such as HSBC, Santander, BNP Paribas, and Credit Suisse.

To date, the average drop in value exceeds 80%. And that excludes the fate that befell shareholders at AIG, Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., etc., whose drops ranged from 95% to 99%-plus.

All this is against the backdrop of an historic stock market rout, and increasing speculation that the new Obama administration is close to embracing the "Swedish model," or temporary nationalization, to deal with the ongoing financial crisis.

Until now, the U.S. has been focused on preserving some semblance of private ownership through the various, tortured iterations of bank bailouts, debt guaranties, TARP, etc.

Judging by the leading banks' rapidly shriveling market cap's, the equity markets clearly anticipate full-blown nationalization . . . soon.