Panic On Wall Street Building - Credit Crisis Threatens Nation's Banks

Dear Subscribers,

Fannie Mae (FNM) and Freddie Mac (FNM) were on the verge of collapse, only to be saved by the full faith and credit of the United States (as well as now it looks like the Federal Reserve Bank of New York).

The Federal Reserve branch of New York is the most powerful regional bank within the Federal Reserve System, given that all the major banks and financial institutions are in New York. They carry as much clout as the entity under which they report.

Sunday Morning, Treasury Secretary Paulson made it clear the government is going to do EVERYTHING in its power to save Fannie Mae and Freddie Mac.

The initial reaction when the market opened on Monday was a huge sigh of relief, and a rally on the open. Yet, after an hour the major indexes were back in negative territory as the market’s reaction shifted from relief to an even deeper anxiety. Literally every one of our reliable economic and market sources were asking the question: Okay, the U.S. government is coming to the rescue, but “Is this too little too late?” 

This morning the Dow Jones has opened sharply lower down as much as 200 points. Between the lingering questions about the Fannie Mae (FNM) and Freddie Mac (FNM) bail out and new warnings by analysts that as many as 150 banks may fail – a full fledge panic may be just days away.

All of this fear is also being fanned this morning thanks to statements by Federal Reserve Chairman Bernanke, who told Congress the U.S. economy is faced with "numerous difficulties," such as strains in financial markets, a shaky job market and ongoing weakness in the housing market. These difficulties are persisting despite the Fed's massive interest rate cuts and expanded lending efforts over the past year.

Will steps taken by the Federal Reserve and Treasury save the country from suffering a massive financial collapse?

The only real way to gain an idea of whether this latest move by the Treasury and the Federal Reserve is going to help is by objectively going back in time to understand how the markets got here.

The story starts in the late 1990s when the Chairman of The Federal Reserve Alan Greenspan decided that he, as the head of the Federal Reserve, needed to make a bet on fiscal policy. Usually the Federal Reserve only makes decisions based on monetary policy. The fiscal decisions are left to the political leaders. However, in the late 1990s the United States was facing Y2K, and a run on banks could have happened if ATM machines and the banking system failed to work on January 1^st of 2000.

Therefore, the Federal Reserve decided to grow the money supply at the rate of 30% in the fourth quarter of 1999. On January 1^st, everything worked fine, and now the Federal Reserve was in a jam. It now had to slow the supply of money, and by the third quarter of 2000 the growth rate dropped to 0%. The rest is history.

Did Alan Greenspan singlehandedly cause the Tech Crash?

With money supply stalled, the investment in technology stocks soon stopped, and the great Tech Crash of 2000 to 2002 began. At its end, the NASDAQ Composite had lost 85% of its value. All because of a bad decision by the Federal Reserve and it’s then Chairman, Alan Greenspan.

“The Maestro,” as Greenspan was dubbed by the media, made one terrible decision. The ramifications are still being felt now. But the question is how much longer could they be felt – and how much worse could it get?

Alan Greenspan and the housing bubble...

Greenspan decided that every American should be a homeowner, whether they were credit worthy or not. He reasoned that the housing market was stable, and that over time this would create a great deal of wealth for the “average American.” Nice concept, but in reality a horrible idea.

Thus, the sub prime mortgage was born with Greenspan’s blessing. Money flowed like water and everyone began to buy homes. No longer was 20% down a requirement. 0% or 5% down became the norm. Speculators began to jump into the housing market as well, and now the United States has a housing bubble...only a few years after a tech bubble! Like all bubbles, the housing bubble finally burst in the first quarter of 2006. Since then, the S&P SPDR Homebuilders ETF has fallen from $45.80 to a recent low of $14.72. The homebuilders have now fallen by 68%.

As the housing market fell apart, it was only a matter of time before loans made to recent purchases would run into trouble. It was kind of like “Musical Chairs” – where the last one standing when the music stops is out. And that is exactly what happened. Starting about a year ago, many individuals and speculators began to have trouble paying their mortgages. Why? These sub prime mortgages were done with adjustable rate mortgages. In fact, Greenspan pushed for this, and thought that individuals would be able to refinance their initial mortgage. Bad assumption. Remember, when you assume it makes an ass out of you and me.

And, of course, defaults led to foreclosures, which have complicated matters more. You see, twenty five years ago an individual would get a mortgage from a bank, who would then hold the loan to maturity, and that was how the bank made money. Then Salomon Brothers and Lewis Ranieri decided to package these mortgages into mortgage backed securities. These were simple securities when compared to the second and third generation of mortgage packaging, CDOs and CDS.

Bad loans were packaged into CDOs that cannot be undone or altered without changing the terms given to investors. Investors are not allowing changes to these instruments, and the unwinding of the CDO market is proving to be a nightmare.

Even Greater Troubles Lie Ahead

It gets worse.  The financial stocks have been crushed. The Philadelphia Bank Index (BKX) has fallen from May of 2007 at 118.33, to the current level of 54.67 -- which is a drop of 54%. Remember that the NASDAQ fell 85% and housing stocks have fallen by 68%. Both the homebuilders and financial stocks have more to fall before they reach the level the NASDAQ saw in 2000 through the low in October of 2002.

In such an environment, energy prices continue higher because of one simple reason, the fall of the dollar. The dollar will continue to fall because the world no longer believes that the United States is fiscally responsible. As a result, the Gold and Energy Options Trader and the Gold and Energy Advisor may hold your only key to financial salvation in the coming months as the financial Armageddon spreading through the U.S. and the world continues.

How far can it fall?

Unfortunately, the consumer stocks may have to fall as much as the tech stocks did in 2000 to 2002, because their credit has been cut due to the sub prime crisis and the complete collapse of credit. Make no mistake about it, credit drove the economy of the United States to heights it should never have seen, and now we are going to have to pay a heavy price.

Usually, the Gold and Energy Option Trader only offers trades in energy and materials instruments. BUT there may be greater opportunities outside these sectors. As a result, the same team that produces the Gold and Energy Option Trader will offer trades in other areas in Super Stock Investor.

Thomas Jefferson offered these words at the founding of our country, “Banking establishments are more dangerous than standing armies.” The next few months may prove to be very difficult as the financial crisis spreads to the consumer, and allows energy market to move even higher.

The current downfall of the United States is a horrible set of events driven by the irresponsible behavior of multiple administrations on both the Democratic as well as Republican side. The legislative branch is also culpable for these sets of events unfolding.  Senator Charles Schumer should feel shame for throwing blame on the regulators for the collapse of Indy Mac Bank. The current collapse happened on his watch as well as the others mentioned above.

Pigs on Wall Street?

Those on Wall Street are to blame as well. They were greedy and deserve much of the blame. But their greed is coming home to roost. One of my friends stated that he felt sorry for those at Bear Stearns and Lehman Brothers. I do not and neither should you. Instead they deserve the current predicament.

The people of this country are slowly coming to understand why this crisis occurred. We are a good people and sooner than later the correct decisions will be made to begin the long corrective process out of this debacle. Unfortunately, the corrective process may take several years, the likes of which the world has not seen since the unwinding of Japan 1980’s financial meltdown that has been playing out for over two decades. We understand the nuances of what can happen from this point onward.

The breakout down of  the corporate and commercial paper market, leading to an erosion of corporate profits as working capital gets hit even more, sending unemployment even higher,  guaranteeing that the U.S. and the world enter a recession and stocks continue to be pressured,

We are not bureaucrats, politicians or on Wall Street’s sell side, but rather a team that is on the inside and knows how to make the correct calls to help you and your nest egg survive this awful time for many. Earlier we quoted Thomas Jefferson and we will end this piece with another quote from him, “Leave no authority existing not responsible to the people.”

When the people take back the authority is when the new bull market can begin.

Best Wishes,

James DiGeorgia

P.S. The profits have been rolling in for the subscribers of my Gold & Energy Options Trader. We grabbed a 64% profit on Friday after racking up profits of 24% and 25% in a matter of days, in fact hours. In the last 11 months the service has a cumulative win of 221% in a “Go No Where Market” (The Dow was DOWN 15% in the same time period). We’re about to make some serious trade recommendations, and I don’t want you to miss out, so sign up immediately to my  Gold & Energy Options Trader and make sure you don’t lose out on the fun and profits.