Friday, September 12, 2008

Another Shoe Drops

The failure of Fannie Mae and Freddie Mac has resulted in an interesting bailout. Basically , the feds are now explicitly backing the bonds which Fannie and Freddie have issued, and throwing the shareholders under the bus.

Not to worry: none of our clients held any of their stock, at least in Schwab portfolios. If you have these stocks at another brokerage company you should call them. The shares dropped over 80% this week.

The feds actually had to back up the bonds because so many of them are held by foreigners, especially the Chinese, who were concerned about the safety of the bonds. Previously , the feds only provided an ‘implicit’ guarantee of the bonds. So to keep all the foreigners from dumping their bonds on the market, which would create major chaos, the feds have agreed to ‘explicitly’ guarantee the bonds.

We became wary of these agency bonds over five years ago, and have not purchased any for clients’ accounts. However, some clients have Fannie and Freddie bonds which were purchased earlier. With the ‘explicit’ guarantee, we are recommending that clients keep those bonds for now. There is a wide spread currently, which would mean a 10-20% loss if sold now, whereas the feds are on the hook for the full face amount if the bonds are held to maturity.

We will review this on an ongoing basis, and review your individual situation at your next appointment. At some point we expect that the spread will narrow enough to enable us to swap these bonds for treasuries, once the markets settle down.

If you have any questions about the current market situation, feel free to call your Cambridge Advisor. If you are in the Detroit area, you might be interested in a live seminar I am giving for PBS on Saturday, October 11 th , at their new Wixom facility. The seminar will address: “Yikes! What Do We Do Now?” Call Carrie if you want to attend = there is a $40 donation to PBS.

This is at least the third shoe to drop during this economic upheaval…how many feet do Financial Grinches have?

Bert Whitehead, MBA, JD

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