To Crash or Not To Crash?

Paulson has revealed his plan about Fannie and Freddie. There are dozens of very interesting and important posts on the blogs so far. Here's a bullet point of what is happening:
  • FHFA takes over Fannie and Freddie, replacing their CEO
  • Dividends are eliminated
  • Treasury can purchase up to $100 billion of a special class of stocks in each company: This means an approximate 15 times dilution on Fannie Mae based on friday afternoon market cap, and a 33 times dilution on Freddie Mac. Basically, these shares have no value anymore.
  • Fannie and Freddie will have to reduce their holdings of MBS by approximately 50% as of 31/12/2009 (anyone interested in buying of MBS?)
  • Bill Gross has had is ass saved by his friends in the government.
  • Fannie and Freddie both intentionally cooked the books in order to inflate their capital
  • William Poole, former president of the Federal Reserve Bank of St. Louis, said taxpayers may face a $300 billion bill to revive Fannie Mae and Freddie Mac. (I think this is the minimum bill, and wouldn't be surprised if the bill was as much as 2-3 times that amount).
In the light of all this, two opposing views can be made:
  • Everything is going well and we keep on playing Alice in Wonderland since we are in good hands with Bernanke and Paulson.
  • We get rational and have a readjustment of the various markets: US bonds sink, yields rise, stocks sink, USD sinks, Gold raises.
My view:
  1. Fannie and Freddie have cooked the books and lied to the markets -> markets should lose confidence
  2. Fannie and Freddie CEOs have openly lied on TV -> markets should lose confidence
  3. Paulson has openly lied to the public -> markets should lose confidence
  4. Financial stocks should get hammered with the loss of confidence and likelihood of book cooking
  5. The debt of the US gov raising by at least $300 billion
  6. It is obvious that the crisis is far from over and is getting worse and worse
The market seems to have chosen to get another line of coke as Futures soar after U.S. takes over GSEs (S&P 500 and DJ Industrial are up 2% in Futures market as I write this).

sources: Bloomberg

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