Notes From Underground: Audacity of Hope to Sheer Audacity (Dec. 27, 2009)

As the markets cope with the ECB’s decision to leave rates as is and the U.K. elections, we must call attention to a story that appeared on the Washington Post website last night. After reporting a massive first-quarter loss, Freddie Mac is asking the government for $10.6 billion in aid. We will write more on this later, but for now, we call your attention to a December piece written after the government quietly nationalized Fannie and Freddie.

While the country outside the Beltway was donning its gay apparel, the Obama administration was doffing its CAP–that is, the cap on the loss potential at Fannie Mae and Freddie Mac. The Treasury Department on Thursday, when the American polity was sitting down to holiday meals, announced that it was removing the caps on capital available for Fannie and Freddie. This was done to ensure that there would continue to be enough money for whatever needs arose to protect against a collapse in the mortgage market’s ability to make loans or sustain resets. The Treasury could do this without Congressional approval, thus giving this illustrious group sovereignty over the U.S. housing market.

The Geithner group did this before the $200 billion limit ran out on December 31. Geithner removed the caps to ensure that the Treasury would be able to replace the FED as the MBS (mortgage backed security) purchase program ends on March 31–wow does this pull the wool over the public’s eyes? It will be interesting to see if the long end of the debt markets can rally off this news, for the recent sell-off has been fueled by the ending of the FED program. If the treasury market fails to find any support off this announcement, the cedibility of Treasury and the FED will certainly be in the spotlight. Obama’s audacity of hope has now diminished into sheer audacity. This will make the U.S. financials shake as markets begin to question the Treasury’s financial credibility with such questionable actions. Can the DOLLAR sustain its rally with such shenanigans?

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