Oil Price Slip… Good for Economy, or Sign of Worsening Economy?

Or both? The recent plunge in the price of oil indicates that this most recent price hike was nothing more than a ruse, and that the oil tycoons are now putting down the prices just to keep us alive long enough to pay them exorbitant prices once again. The recent financial disasters including the Fannie Mae/Freddie Mac fiascoes and the utter failure of Lehman brothers prompted yet another price plunge in the oil sector as well as the retail sector. What this basically means is that people are afraid consumers will now buy less now that they have less.

Lehman brothers was an age old company with a place in the New York Stock Exchange since 1887 and went IPO in 1899. A few days ago it filed for bankruptcy protection, and is currently in the process of liquidation. Freddie Mac and Fannie Mae were originally government organizations that helped the banks finance mortgages. Recently Merrill Lynch was purchased by Bank of America at a cheap price thanks to the recent home mortgage crisis.

In any case, there will be a lot of financial folk about on the street looking for jobs. Alan Greenspan says that the events in this past month will be recorded as the most important in the last 100 years.

A Learning Experience in Stock Trading

First and foremost, if you are unsure of the stability of a stock, sell it all before the end of each trading day. That way you won’t be screwed like the thousands of investors of Freddie Mac and Fannie Mae. Secondly never invest in companies that could potentially be bought out by the government, such as those two mentioned before. Thirdly and finally, don’t invest in corporations that were created by the government; these two are the only ones I know and they both have pretty much slapped the investors twice in the face in response to the housing crisis and now this government seizure.

US Economic Intervention At It’s Finest.

On Friday right before markets closed, news was released by an anonymous but credible source about the Monday takeover of Fannie Mae and Freddie Mac by the Treasury Department. The two monster corporations, spawns of irresponsibility created by the US Government in the past, are once again officially part of our tax bill. In the past, when these two large corporations were allowed to go private (Fannie Mae first, then Freddie to create competition), investors could feel safe knowing that they would never go under due to help from the Treasury.

FRE was at it’s peak $70 in 2004 and FNM was almost $90 in 2001. Now people involved in the free market will be punished for FRE and FNM’s fiscal mismanagement and dependency on the treasury. On Monday, the stock is expected to plunge to around $0.25 per stock based on dilution of stock upon the Treasury’s capital infusion. The people paying the price for this decision will be the American taxpayers and Fannie Mae and Freddie Mac stockholders, those benefiting are the irresponsible ones miscalculating their money and overspending (both the corporations themselves and the homeowners who couldn’t afford their homes).

Together, Fannie Mae and Freddie Mac own or guarantee almost half the home loans in the country’s roughly $12 trillion mortgage market. You can read the history of these two monsters here

Freddie Mac and Fannie Mae

If you have read the news in the past few weeks, you may have noticed the names come up. I was interested in their history, so I looked it up. I was most surprised to find that they were both the result of government intervention. Fannie Mae came first, her old name was the Federal National Mortgage Association and she was a government agency from 1938 to 1968. Created in 1938 as part of Franklin Delano Roosevelt’s New Deal, her job was to counter the growing reluctance in the country for private lenders to invest in home loans. The way she did that was to provide local banks with federal money to finance home mortgages, thereby increasing the availability of affordable housing. The end of its former relationship with the US Government came in 1968 when Lyndon B Johnson took it off the Federal payroll to lessen its effect on the national deficit. So for two more years it was a veritable monopoly on the mortgage finance market.

It is for that reason that in 1970 the US Government sanctioned a new member, Freddie Mac (Federal Home Loan Mortgage Corporation) , to join the circus. According to current statistics, current assets of these two companies combine for a total that is 45 percent greater than that of the nation’s largest bank. The funny thing is their combined debt is equal to 46 percent of the current national debt. If you are a shareholder, Fannie Mae and Freddie Mac are the only two Fortune 500 companies that are not required to inform the public about any financial difficulties that they may be having. The sad thing is, U.S. taxpayers could be held responsible for hundreds of billions of dollars in outstanding debts.

It is for this reason that as of late the question has come up whether to federalize these two corporations, and bring it under control at the expense of the federal budget, or to let the free market and the implied safety provided by the US government keep them alive. Either way, they won’t be allowed to collapse.