George Soros on Fannie and Freddie

Watch out Mike........Preserve your cash now

Fannie, Freddie crisis not the last - Soros Reuters Tuesday, 15 July 2008

Billionaire investor George Soros says the crisis over Fannie Mae and Freddie Mac will not be the last, and notes that the broader credit meltdown will impact an already slowing US economy.
The Treasury Department agreed to raise Fannie and Freddie's credit lines above the existing US$2.25 billion apiece and buy shares to strengthen their finances, if needed. The Federal Reserve offered to let the mortgage finance companies borrow at the rate it charges banks for direct loans.
The government's aggressive move on Sunday underscored problems plaguing the markets and the potential for them to send the US economy into a severe recession.
"This incident (with Fannie and Freddie) is not the last one," Soros said in a phone interview, adding the year-long global financial market turmoil represented "the most serious financial crisis of our lifetime."
"Freddie Mac and Fannie Mae have a solvency crisis not a liquidity crisis," said Soros. "There's no problem in their borrowing. And in fact, insofar there is a problem, the Fed is there to provide the liquidity."
That said, both Fannie and Freddie are "extremely leveraged," he said. "The deterioration in the housing market, the foreclosures are going to cause losses which exceed their equity," said Soros, whose famous bet against the British pound earned his Quantum Fund US$1 billion in 1992.
Fannie and Freddie shares rose as much as 30 percent in trading before the opening bell on Monday, but was unable to hold those gains throughout the session. At close, Fannie shares ended down 5.07 percent to settle at US$9.73 while Freddie shares lost 8.26 percent to settle at US$7.11.
US stock indexes also posted losses. The Dow Jones industrial average lost 0.41 percent to close at 11,055 points, while the Standard & Poor's 500 Index shed 0.90 percent to end 1,228. The Nasdaq Composite Index slid 1.17 percent to 2,212.
The government's drastic measures could keep the US dollar under pressure, Soros added.
"I think the dollar is vulnerable because the economy is going into a recession and the actions of the authorities do involve the accumulation of debt," he said. "There is various ratios by which the creditworthiness of a country's assurances are deteriorating."
Soros said the credit crisis is having a growing effect on the US economy, not just financial markets. "It is an idle dream to think that you could have this kind of crisis without the real economy being affected," he added.
All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.
"When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal," Soros said.
However, now the "armoury" is depleted, he said adding that Bernanke can't lower interest rates because of the effect it would have on the dollar and he can't raise interest rates because of the looming recession.
"Therefore, his options are limited – he is boxed in," Soros said.