Michael Shulman

Weekend at Bernanke's

by Michael Shulman   07/24/08

Federal officials, including Treasury Secretary Hank Paulson to Chairman Ben Bernanke to Rep. Barney Frank (D-Mass.), engineered a massive "rescue" of Freddie Mac (FRE) and Fannie Mae (FNM).

Something had to be done: Freddie weathered last year's volatile summer, staying close to $55 but got perilously close to $6 July 14; Fannie was trading at $63 a year ago and closed July 14 just north of $10.

To clean this mess up, simply put, the Fed is going to lend the two fund providers as much money as they need to get out of hot water. Pending legislation will be submitted and is supposed to be approved without contest to enable the Treasury to lend them the oodles of money for a bailout -- perhaps as much as $300 billion.

This is only a tiny first step in terms of the dollar amount, but the action was necessary to keep things going in the near term. This should calm the run in the companies' stocks -- their actual solvency and their bonds haven't been questioned yet, despite the fall of equities.

DEAD 'MAC' WALKING

Of course, if they were held to the accounting standards used for other lending institutions, Fannie and Freddie have been technically insolvent for a long time. Sen Chris Dodd (R-Conn.) was one of the most vocal bureaucrats to point this out. He's one of the few people who acted like a grown-up in the past few days and now has far more clout than even President Bush when it comes to this issue.

So, what's this mean for your long portfolio, especially bank and financial-related stocks?