"Default swap spreads on GOVERNMENT debt doubled Friday. That has never happened before."
before' coming up. Ready?
Let's start with Fannie and Freddie.Oh, my.
As anyone who has been reading The Ticker knows, I have been saying for quite some time that Fannie and Freddie are in fact "short to zero" candidates for the common stock. This is simply due to the mathematics of their financial situation - they are levered up anywhere from 60 to more than 200:1, depending on what you include and exclude from "capital" and "credit book."
I use the worst-case set of numbers, because in a bad market, that's what you wind up with - therefore, I include all of their credit guarantees, and exclude all intangibles such as "good will" and "tax loss carryforwards", with the latter being particularly important in this case because Fannie, for example, has some $13 billion in deferred tax assets.
That's not money, its an offset against future taxes. But to pay taxes you must first make a profit, and in a bad market, those are worth a big fat zero.
So here we sit with two firms that are running with leverage ratios that make a Hedge Fund look like a convocation of the Girl Scouts.
The Federal Government continues to claim that they are "well-capitalized." Uh huh. And I'm the Easter Bunny. Nobody running with a leverage ratio of 60:1 is "well-capitalized", say much less someone running with a leverage ratio of 200:1.
How did this happen? Quite simple - our government allowed it and in fact prodded these firms into doing it.
There's plenty more...