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Treasury's Double Jeopardy


Markets may not cheer GSE's nationalization for long.

"I'll take GSE's for $200b Alex"

"It screwed everyone involved including those who had no desire to get involved... but had no choice in the matter"

"What is the Treasury's GSE's black-hole-from-hell conservatorship plan?"

"Correct... you are our new champion!"

I won't be looking for that question on any soon-to-run Jeopardy episodes, but the obscenity announced this weekend by Hank Paulson & Co. regarding -- Fannie Mae (FNM) and Freddie Mac (FRE) -- resets the bar in the art of throwing other people's money down the rabbit hole, and will certainly be worthy of future financial Trivia. The lowlights can be summed up as a $200 billion blank check to the Treasury Dept. from taxpayers' money to finance mortgages that no one else seems to want to finance – not at current prices at least. And that's what we do know about the deal; one can only imagine that the fine non-print contains the kind of financial abominations the likes of which cannot be spoken.

Of course there is no reason to be surprised. This maneuver is 100% consistent with the government grand plan to boil us like frogs in a pot of debt since, in the govie's estimation, it appears that too many people have suddenly decided not to jump in the cauldron of their own volition. If I've lost you in the analogy, think of it this way:

The fabric of the US government is hell-bent over avoiding another Great Depression. The alphabet soup of borrowing facilities announced by the Fed over the last 14 months was the first major effort to stem financial institutions inability to lend. Alas, as measured by the impact on these institutions' bonds, we can safely conclude that the effort failed.

Then, when we Americans stopped our "borrow and spend" routine, our esteemed legislators borrowed money for us and shoved it up our... throats in the form of the "stimulus package". That stunt was a failure as well.

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Now financial institutions not only can't lend, but they do not want to lend. Have no fear, Uncle Sam is here, and it has taken it upon itself to take taxpayers' money and put it up for lending to people who either don't want it, or should not have it. To add insult to injury, taxpayers are also being forced to make up for the vaporized equity behind these bad loans, so that these loans can be made good before they default again. Wanna guess how this spark of genius will end up?

Next up, and at risk of trying to predict the future, the fourth and perhaps final brain-cramp of our rulers is likely to take the form of some kind of monetization of the bad loans (CMBS', commercial loans, credit card/auto loans, etc.) which are next in line to go up in a mushroom cloud. In English, this means that the government, finally unable to borrow more money on our backs, will literally start printing dollars to buy bad debts ushering in a hyper-inflationary spiral worthy of its evil twin – the deflationary spiral of the Great Depression.

What does this all mean for financial markets? An answer is available from anyone who can also walk on water. My guess is that for the here and now, i.e. between now and when the GSE induced relief rush wears off, equities will give Boo a head-spinning bear-market-short squeeze enema (S&P500 (ESU8) futures are up 37 points as I write on Sunday evening), together with a strong rally in gold and commodities, a shake-down of the freshly baptized dollar bulls, and a rush away from the safety of Treasuries. Beyond that... one step at a time.
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