Tuesday, April 15, 2008

Could the USA Lose it's Triple A Rating?

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My first comment when I read this story was... how does the US still have a triple A rating? Oh wait, the way S&P and Moody's rate things, anything with a heartbeat gets a triple A. But in reality, we are a subprime borrower, dressed in fancy emporer's clothes. I've been warning (among others) about how the steps taken the past few months to INCREASE (not decrease) risks to Fannie Mae (FNM) and Freddie Mac (FRE) are making them more and more likely to be fully nationalized down the road. Nationalized is a nice word for tax payer bailout. Barron's talked about this just a month ago [Mar 10: Is Fannie Mae the Next Government Bailout?]. Frankly it is quite pathetic that these 2 entities are trading like solar stocks or Chinese small cap stocks [Nov 20: Freddie and Fannie Trading like Chinese Small Caps] - they are supposed to be bastions of stability... yeh right.

I've outlined all the layers of risk we've been adding to these 2 entities over the past few months, earlier in the blog, so I won't rehash. Why would we be doing this? Because the mortgage market has essentially frozen. These 2 entities used to support less than 50% of the mortgage market - in the past quarter it is now 80%+. Meaning truly "private" enterprise has less than 1/5th. They are now becoming more and more levered by the month to help "support" the mortgage market... taking on more and more assets that are falling in value as home prices wither and homes continue to go upside down. So what's the end game here? Potentially fatal for these 2...
  • The potential cost to U.S. taxpayers of bailing out Wall Street firms stricken by the credit crisis could grow to as much as $400 billion in a deep and prolonged recession, Standard & Poor's estimated yesterday.
  • That bill would soar by another $1.4 trillion if it included the cost of bailing out Fannie Mae, Freddie Mac and other government credit agencies, whose losses could be so massive that the U.S. government could lose its AAA rating in what would be a calamity for the U.S. Treasury and the dollar.
  • "Even under a severe stress scenario, the contingent fiscal risks of broker-dealers will not threaten the AAA rating on the U.S. government," said John B. Chambers, chairman of S&P's sovereign ratings committee, but because the government credit agencies have grown to such an enormous size, their insolvency would put pressure on the U.S. government's own finances.
  • Peter Schiff, president of Euro Pacific Capital, questioned why the government has opened itself up to such big liabilities and at the same time set in motion another round of risk-taking by brokerages that may require future big bailouts. The government for decades has provided insurance for bank depositors but until last month had provided no guarantee for brokerages.
  • "Leveraged speculators need to know that it is not 'heads they win, tails the taxpayers lose,' " he said. "By bailing out lenders who extend excessive credit, the Fed simply invites more of that behavior."
  • "By interfering with this process, the Fed simply guarantees more losses and even bigger bailouts in the future," he said. "Wall Street executives amassed fortunes by making extremely risky bets. Now that those bets have soured, why is it taxpayers that have to swallow the losses?" (because the sheep have no idea what is happening...)
  • Congress and the Bush administration recently increased the potential costs to taxpayers by increasing the risks to Fannie and Freddie, reducing their capital requirements and allowing them to purchase riskier loans made to troubled subprime and jumbo borrowers, S&P said.
  • The goal of most of the government's rescue actions has been to avert a severe recession, S&P said, but they have also greatly increased potential costs to taxpayers by opening the door to bigger bailouts. The agency noted that the cumulative risks and losses to banks and brokerages keeps deepening each month the housing recession worsens.
Well I'd be worried about this, but I've been assured the economy will be fine "in 6 months" so this is just a lot of hand wringing over nothing (cough). But just in case folks - have that wallet ready when Uncle Sam calls on you.

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