Freddy's Back: A New Nightmare On Wall Street

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Freddy's Back: A New Nightmare On Wall Street
Why the mortgage lender was always "too big to bail."

By Nico Isaac
Fri, 07 May 2010 19:30:00 ET

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This April, a remake of the iconic horror flick "A Nightmare on Elm Street" was released in theaters. In it, the main knives-for-fingers psychopath Freddy Krueger terrorizes his victims by turning their sleeping horrors into reality.

Well, from the realm of film to that of finance, a similar script is playing out. Call it, A Nightmare on Wall Street. In it, "the main tormenter" Freddie Mac scares the living daylights out of debt-saddled America by fulfilling their most terrible, "too-awful-to-utter-aloud," subconscious fear: namely, that the U.S. government is powerless to save the economy from a hemorrhaging credit market.

Enter recent news report on Freddie Mac's "Please sir, can I have some more" request to taxpayers. The story, in short: Since being taken over by Uncle Sam in September 2008, the mortgage giant has been on the receiver's end of more stimulus than any other U.S. enterprise in history. To wit:

On its own, Freddie alone has been injected with $50.7 B-B-Billion in federal aid
The U.S. Treasury and Federal Reserve has spent $1.4 trillion to buy the mortgage-backed securities of both Freddie Mac and Fannie Mae
And, the Fed has slashed interest rates TEN times to a record low of 0% -- i.e. "free money."

YET -- despite the bailout efforts, Freddie's balance sheet is spattered with more red than the opening scene to "Elm Street." First quarter net loss soared to $6.7 billion, while total net worth plunged to negative $10.5 billion. Hence -- the company's latest appeal for and additional $10.6 billion in government assistance, all the while admitting "significant uncertainty" that said infusion will be enough to keep the company afloat.

What makes the situation worse is the wave of public optimism and professional surety surrounding the expected success of the September 2008 rescue package. See:

"Wall Street May Cheer Freddie Bailout," began one media clip from the time. "There's no doubt in my mind that this will stabilize the money market. The clarity and certainty of the conservatorship should have a stabilizing effect on the markets, banking system, and mortgage industry." (USA Today, 2008)

"The takeover of Fannie and Freddie may be a sign that the market has bottomed," added another. "It's hard not to be encouraged by the end of the Fannie-Freddie Death watch." (CNN Money, 2008)

(Bailouts DON'T Save The Day: At the start of 2008, EWI warned: The giants of finance were NOT "too big to fail." Now, our 2010 Financial Forecast Service publications reveal where the bear will go from here.Act now.)

In reality, the futility of the bailouts to save Freddie was a foregone conclusion -- one our analysts woke up to right from the start. Here, the following insights from EWI publications strongly opposed the "Too Big to Fail" mainstream mentality:

August 2008 Elliott Wave Financial Forecast: "The government plans to rescue the mortgage giants is doomed to fail because it perpetuates the myth that the bad loans if Fannie and Freddie's books are worth anywhere near the $5.2 Trillion they saw they are."

September 2008 Elliott Wave Financial Forecast: "One of the biggest breakthroughs in the age of financial engineering is the financial bailout. Their periodic appearances have come so regularly that EWFF speculated in 2001 that they can be used to identify bull and bear markets based on their timing in relation to the trend."

To reinforce this view, EWFF presented the following close-up of biggest bailouts of the last 40 years versus the DJIA, as measured in ounces of gold.

The conclusion was as follows: Bailouts tend to occur near stock market lows. In bull markets, those lows invariably remain intact, such as 1982-1999. In bear markets, those lows are always ultimately breached and followed by lower lows, such as 1966-1982.

Seeing as the most significant bailout measures from the stock market's 2000 peak coincided with lower lows, EWFF's bottom line in 2008 was clear: "The latest government rescue efforts clearly confirm the ongoing bear market, signaling further decline ahead."

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Tags: Freddie Mac, Dow Jones Industrial Average (DJIA), bailouts

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