That’s a good explanation of the situation. FRE’s bond auction yesterday was also a disaster. Here is what the Wall Street Journal said:

“The five-year notes were priced to yield 4.172%, or 1.13 percentage point above yields on safe Treasury notes, the highest “spread” Freddie has ever paid on such debt.”

So, bond investor’s opinion of FRE is at the lowest point ever.

Matt

I was just checking out the various financials, and I don’t understand it either.

Q) Why were the GSE’s stokcs hammered?
A) They could be nationalized, leaving the stock holders with no equity.

Q) Okay, but why would they be nationalized?
A) They may not have enough capital to pay the mortgage bonds. If they default on their mortgage bonds, it will throw the US financial system in the blender.

Q) Right, but they just pay off the bonds with payments from the housing loans, just like they’ve been doing for years.
A) With home prices crashing, many home-owners are defaulting on their loans.

Q) So what you are saying, is that without the US government backing the bonds, the GSEs would default on their bonds because homeowners are defaulting on their loans.
A) Exactly! Now you get it.

Q) So what about the commerical banks that issued MBS, and the investment banks that issued CDOs based on the MBS? Don’t they have the same problems as the GSEs?
A) ….

actually, I ralized that I have DEC 40 puts (not Oct 40) on JPM, because the Oct ones were non-standard ones (maybe from BSC).

“Lehman managed to trade up 4.8% to $13.70 even though analysts at Goldman Sachs and Sanford Bernstein suggested it and a host of other brokers would take hits in the third quarter…The Goldman report maintained that Merrill Lynch would be one of the hardest hit in the third quarter as a result of its exposure to the collateralized debt obligation market. Yet, Merrill jumped 2.5% at $24.41. Goldman also lowered estimates for JPMorgan Chase due to the hit it took on auction rates securities. But JPMorgan gained 4% to $37. And the analyst even called for a short position in Citigroup, but that bank held its own and ticked up 1.8% to $17.49.”

So the finacial stocks that Goldman panned all traded up today. There was one finacial that didn’t do so well:

“The one name that the Goldman analyst maintained a long position in was Morgan Stanley, which tumbled 1.8% to $37.40.”

Ouch.

Thanks for the help

“Energy stocks bounced hard today despite another rise in the buck. XNG jumped 3.5%.

This does not augur well for the longevity of the rally.”

This is the bounce that the big funds will sell into. The technical term is “distribution.”

Matt