Fannie And Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have

A picture is indeed worth a thousand words and in this case, a potentially large haircut for its owners. Why do you think Bill Gross has been making the circuit harder than ever over the past couple of weeks.

Why again should the $5 trillion in Fannie Mae (FNM) and Freddie Mac (FRE) senior mortgage backed debt be backed by the US taxpayer?  I can’t believe that China, Russia and Bill Gross have never seen an actually Pass-through before. The one below is from July 2008. They invested in these higher-risk securities for a higher payout. Simple.

Look at the big ‘ol black letters right below the Fannie Mae Logo and security description.  That is what they call a ‘disclaimer’, investors. Bill Gross has been out for months scooping these securities at depressed prices hoping the tax payers make him a profit.

If .gov backstops everything, open-ended and retroactive, US Treasuries sit in a precarious position. WHAT IF spreads go the wrong way due to a buyers strike on Treasuries. If they back this debt, there is no going back.

Of the $5 trillion, we know that about $700 billion is Alt-A and Subprime and another $1 - 2 trillion plus could act much closer to Alt-A and Subprime in the future.  This is due to faulty automated underwriting systems called DU and LP respectively, set to ‘way too easy’ mode during the bubble years. $5 trillion is equal to the entire public float of the US Treasury with $1 trillion owned by foreign central banks. They undoubtedly bought this stuff with full knowledge it was not backed by the Government.

I put out a story on this earlier: Fannie/ Freddie: Now We Wait for Help or Hell

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