Saturday, January 24, 2009

Phoney and Fraudie Suck Your Wallet Dry

Those two fantastic twins, Fannie Mae and Freddie Mac, are at it again. They just can't get enough of Uncle Sam's unlimited wallet:

Freddie Mac, the mortgage-finance company under federal control, needs as much as $35 billion more in federal aid, and Fannie Mae may soon ask the U.S. Treasury Department for rescue funds as well.

I'll spare you the details, but it's clear that their exposure to bad home mortgages is getting larger. There is no end to this in sight. If these two pathetic excuses for finance companies can't be straightforward enough to identify their full exposure to junk mortgages, then other firms can't be far behind.

Take a look at the banks that seem to be successfully navigating the Alt-A implosion, specifically JPMorgan and Wells Fargo. There is no reason to believe that their risk management techniques are any more robust than those of Merrill Lynch or WaMu. They all hire from each other! The same moronic, preppie MBAs hop from firm to firm with their "talent" for massaging turds into gold bricks.

Merrill Lynch and WaMu dissolved partly because they had a weak handle on their true exposure to bad loans. JPMorgan in particular will now have to take a "one-time" charge (who really believes it's just once?!), as the article specifies further down, as a result of WaMu's misrepresentation of the quality of the assets it sold to Freddie. Auditors at JPM and WFC will be very disturbed this year when a lot of their "prime" mortgages are revealed as garbage.

My decision to turn bearish again on XLF is fully justified by the above. Stay tuned for more bloodletting.