The $21 Billion Hot Potato

With global investors attacking any sovereign government that’s running massive deficits or stuck with a pile of bad debts …

And with Uncle Sam obviously the world’s greatest debtor, beggar and fiat money printer …

Some folks at the Treasury Department now fear the United States could be the next victim.

So they’re scrambling to get rid of at least SOME of the junk they piled up during the great bailout frenzy of 2009.

Case in point:

The government officials running Fannie Mae and Freddie Mac have decided to force big banks to take back $21 billion in bad mortgages.

If they can get some of these sick assets off the government’s books, they figure, they can say they did SOMETHING before global investors start attacking.

So they’re using various loan provisions to force giant institutions like Bank of America, JPMorgan Chase, Wells Fargo and Citigroup to buy some of them back.

But these bad loans are a hot
potato that no one wants!

Fannie and Freddie certainly don’t want them. Just since 2007, they’ve already lost $202 billion on loans like these, a figure that dwarfs the $21 billion in loans they’re trying to pawn off to the banks.

Meanwhile, the banks wish they could stuff every one of these bad loans into lead boots and toss them into the East River.

The loans are already in default. The homes used as collateral are now worth far less than the outstanding balances on the loans. And, inevitably, the banks that get stuck with them are going to take huge hits to their bottom line. To whit …

• JPMorgan recently said that it loses about 50 cents on the dollar for every bad loan it has to buy back.

• Bank of America’s mortgage division lost $3.84 billion last year, thanks largely to these buy-backs. Plus, the volume of buybacks is increasing so dramatically, it has to set aside $1.9 billion and hire new employees to process these buy-backs.

• Wells Fargo had to repurchase $1.3 billion in these loans in 2009 — THREE TIMES the 2008 amount — and also had to pay nearly $1 billion in costs as part of the repurchases.

• Citigroup has had to increase its repurchase reserves six fold this year alone!

And this effort to get bad loans of the books is just ONE example of the spreading fear among Washington officials.

Look. They saw how global investors dumped Greek bonds a few weeks ago. And they saw it happen AGAIN this week as investors attacked Britain. They know we could be next.

What they DON’T realize is that shuffling a few billion around is tantamount to moving deck chairs on the Titanic.

It’s too late to prevent an all-out attack on the U.S. dollar and U.S. bonds. And when it hits, you can expect a series of dramatic changes not only in the U.S. bond market, but in every asset class.

My recommendations:

1. Don’t touch long-term bonds with a ten-foot pole;

2. Keep most of your money tucked away in a safe place, even if the yield you earn is disappointing; and

3. Stay on the look-out for major profit opportunities — both with up and DOWN moves — in all FIVE asset classes.

Good luck and God bless!

Martin

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