The Fannie / Freddie Saga Benefits Short Sellers of Dollars, Financials

July 12, 2008

Early this year there has been talk about how the US economy could experience a V or W or L-shaped economic situation, and now it seems that the economy could indeed be heading towards further deterioration. Although this past week has been one bereft of many major economic releases from the US or Eurozone, traders and investors have been subjected to more negative news coming from the US financial sector.

On Friday, the US dollar fell sharply against the Euro, Swiss franc, British pound and the Japanese yen in the currency markets as crude oil futures reached another all-time high of $147.27 on worries that Israel may be preparing to attack Iran, and on concerns that Fannie Mae (FNM) and Freddie Mac (FRE) - the two biggest sources of financing of home loans in the US - are insolvent, owing more money than what their assets are worth, and are having problems with raising enough capital to stay afloat. If you don’t know these two catchy-sounding entities, it’s time you do as these listed companies (they are actually Government-Sponsored Entities or GSEs) own or guarantee almost of the $12 trillion worth of US home loans, owning $5 trillion of debt.

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