On September 11th, 2001, I was at work when we witnessed the world trade towers collapse at a safe distance. Two co-workers who have much better grasp of political implications and future vision stated this day would change the world. At the time, I didn't quite understand, since, I saw it as "two buildings collapsed", and yes, the terrorist aspect would translate into some sort of counterstrike, but I assumed that would be the end of it.
After all, if both buildings collapsed because of a structural issue, the result of the buildings and people deaths would be the same. But the root cause of the event, and the implications, I didn't see the far-reaching effects.
September 5th, 2008 is a financial ground zero, the start of recognizing financial collapse of a magnitude never seen before. Either in size or as a percent of GDP of the country where financial failure occurred.
After hours Friday, US government announced that Freddie Mac and Fannie Mae are both going into conservatorship. In effect both companies are insolvent, and combined are responsible for over 5.5 Trillion dollars. To put this in perspective the US debt is currently 9 trillion dollars, and this is already causing significant issues. The total GDP of USA is about 14 trillion.
This is not meant to indicate that 5.5 Trillion dollars is worth nothing, and therefore is pure liability. But in "accounting" standards, if the USA books was re-assessed, and argument could be made the responsibility of the debt should show on USA outstanding debt until paid off. Congress already passed close to 1 trillion dollars of debt to be taken by USA on the bottom line of the balance sheet of "USA".
Monday may be a huge rally, unseen in recent times, the market may take this as "we are saved". The reality is, losses will now be taken on banks balance sheets sooner rather than later, as stock prices and preferred bonds are revalued lower. The reality is, the US Government will now be the primary go-to person for loans, kinda like a communist country controlling all financial matters. This is being spun as a restructuring, not ownership of these two companies. And although currently that is correct, looking down the line, who will take on this bad debt?
What company in the USA or the world wants it as it stands now? The government, if it could have, would have flipped these companies like Bear Stearns, but it couldn't.
Whatever happens in the next week, long term there is only down now, until the losses are realized and the companies (if ever) are re-privatized.
I'll be blogging more, probably either Sunday night or Monday after the market either rallies to DOW 12,000, or plummets. I suspect the spin will be good, and it will rally, a great day to get the heck out of dodge if you haven't yet. In two - three weeks earnings season for banks and other financial companies begins, and it can't yield a gain from this, unless the government assumes upfront face value, then be prepared for interest rates to rise, and the cycle to accelerate.
One way or another, the debt must have a consequence, there is no such thing as a free bailout.
Update: 2-9-13, see my entire Financial Ground Series milestones to record the journey being taken.