Some Rescue Notes and FRE
According to Paulson, the movement of injected capital will begin with $125 billion to 9 large nine banks already signed on and with one managing TARP plan. Then, small and mid-size regional and commmuity banks and consumer financial services, which FRE is a part, affected adversely by the credit and mortgage crisis are next in line for another $125 billion. Next, toxic assets will be purchased with 100+ billion and more if need by approval.
Interbank loaning renews, credit flows, the economy is saturated with fresh cash and credit, stablization is achieved and we recover going on wiser for the experience. That is the US plan in a nutshell.
It is a top down movement of capital from the large to the small. If if goes this way, there will be naturally occurring bottlenecks as the processes of capital infusion and debt release are gradually distributed. Time to credit flow recovery depends on how fast the big banks, regional banks act between themselves and other financial institutions.
Wayne Angell correctly proposed another view, which would get things moving a lot faster; invest in FNM and FRE, take care of the toxic assets now which are weighing heavy on the banks balance sheets, encourage national investment to support these actions and the show will be on the road again.
But, the the only weak point in that plan for a politically sensitive administration is that it does not deal with the national distaste and international concern over FRE and FNM as fiscal crisis culprits nor does it allay the hard feelings still lingering over massive losses and write downs in the 3rd quarter. These pyschological barriers are still clouding a rational estimation of FRE and FNM and it seems Paulson and company do not wnat to stoke the fires of already angry citizens who, by the way, have a completely distorted picture of events leading to the crisis. Is there then any wonder that those analysts/traders/asset managers listening had nothing to say at all?
More than that, the government also has also allowed the perception to occur in investors that FNM and FRE securities are risky when they are not. The common stock are implicitly backed by the US. government and are the backbone of real estate in the US. Even so, the government risk rating for the GSE's is 20% while Treasury bills have zero risk rating now and a lower percent yield. It is reported, that there are internal government efforts to lower the GSE's risk rating to 10%. If that is accomplished soon, FRE and FNM will be considered a safe haven for investment in the currently unforgiving economic environment.
FRE and FNM stayed the course today and that is a good sign that things are looking upward in the near future. It is only a matter of time before investors realize that both the safety and returns for FRE and FNM will extraordinarily exceed the small Treasury bill yields and will put many who lost footing back on their feet.
All that remains is a gathering of firmer investor confidence to enter now while the very under valued price is still extremely low.
October will be rocky as it always is with economic reports giving bad news in a bad year and even more so with the current credit and economic climate that makes some investors skittish. This is a temporary condition. The clean up is in progess and on the way to completion. There is no where to go but up and down till Halloween and then up greatly over the short and long term.