Fannie, Freddie to the rescue? Don’t bet on it

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The last few days of August finally gave market people a few days of moderate anxiety during which they could consider when the next wave of terror would start. I think we have enough time to get in a decent Labor Day weekend and to consider some tactical long positions.

Whatever the Fed watchers tell you, it’s not because the central bank has really caught on to how shallow its institutional knowledge of market plumbing really is. The discount window opening and much-hyped conference calling, choreographed with pre-conference call calls, was a pretty damp firecracker. The Fed funds rates achieved day by day are far more significant and have been far below the Fed funds target rate.

Within the world of central banking, there’s been a lot of Fed-bashing. On the eve of that credit market Black Thursday in mid-August, say the non-US central bankers, the big European banks needed dollars, couldn’t get them overnight and so sought euro, yen and sterling funding and then found the foreign exchange swaps market was closed to them. The Fed, they say, should have made sure there was a functioning dollar market not just 10 minutes before the US closing but on a 24-hour basis. Round world, you see.

It will take a while for the direct, targeted provision of liquidity to get organised, given the internal splits within the administration and Congress. A key institution is the Office of Federal Housing Enterprise Oversight, which has broad powers over the policies of Fannie Mae and Freddie Mac.

This is a problem. At a time when America, or at least Wall Street, needs a spineless hack as the head of a key agency, it is saddled with a credible man of principle: James Lockhart, OFHEO’s director. Yale graduate, Harvard MBA, lieutenant in the nuclear navy, risk management software entrepreneur, senior insurance executive, and former head of the Pension Benefit Guarantee Corporation. “A real hard-ass” in the words of a mortgage finance executive. It doesn’t seem as though he can be intimidated by the threat of being sent back to Plano, Texas, to work in his uncle’s car dealership.

Lockhart was appointed in the middle of last year to the directorship when there was no immediate, obvious cost to anyone of having a competent, effective regulator who actually knows what those buttons on his computer are connected to.

What is worse, his resistance to Fannie and Freddie ballooning their balance sheets and loosening their controls is reinforced by his experience in a previous job. The Pension Benefit Guarantee Corporation, a thinly capitalised government insurance operation, which charged inadequate premiums for covering beneficiaries of failed pension funds, was in turnround, as they say in Hollywood, during his tenure from 1989 to 1993. Lockhart had to clean up other peoples’ messes and one can guess he doesn’t want to do that again.

So it will only be after many more problems surface and under strict conditionality that F&F will pump a bunch of new money into the housing finance pipelines. Enjoy this trading rally while you can. Try not to think about the nasty surprises that could still be out there.

Some of you, however, have been, or will be, forced to exercise a “resume put”. In other words, you will lose your job. What to do?

If you can’t make millions in 15 minutes with one of the trades that has done well until recently, such as a yen-short, Turkish lira-long, total return swap, how about making millions in 15 minutes by marrying it?

Put down that cardboard box and go buy a copy of The Fortune Hunters by a friend of mine, Charlotte Hays. It’s about women who marry money. I called Charlotte, a Washington-based self-confessed recovering gossip writer and professional southerner, to see how the techniques of female carnivores could be translated into advice for the newly unemployed Wall Streeter.

Charlotte advises you to “buy expensive luggage and keep that fast car so she doesn’t know how much you need her. Practice The Look in the mirror”. (The Look expresses unconditional adoration, submission, devotion, attraction, etc).

As Charlotte points out: “You are doing what a woman does in the same circumstances, only it will be harder to pull off because women are cannier. You must allow her interests to dominate, which will be hard for someone used to being a Master of the Universe. If she likes square dancing, then you like square dancing.”

Consider it – you can’t be too picky.

johndizard@hotmail.com

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