Jonathan Campbell
Research for Empowerment and Survival

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Bad Moon Rising Economic Alert 3
July 12, 2008
The Meltdown Has Begun

Contents:

1. Fannie Mae and Freddie Mac at the Brink
2. Belgian Bank Insurer Fortis predicts imminent meltdown
3. What to do now?
4. Wild Card: U.S., Israel, and Iran

Fannie Mae and Freddie Mac at the Brink

If people were wondering whether we’re in for bad times, this last week should have widened their eyes just a bit. The stocks of the two primary U.S. mortgage companies – Fannie Mae and Freddie Mac, which together own or guarantee $5.2 trillion dollars in home loans, about 40% of all U.S. mortgages – slid to the point where their future is in grave doubt. So far this year the firms have lost 75% of their stock value.

The Bush Administration is considering providing them access to the Federal Reserve Board’s bank bailout loan program or, if the companies’ capitalization (amount of cash and real liquid assets, compared with loans) is too low, to put the companies in government receivership (that is, essentially acknowledging bankruptcy and wiping out their stock value). The fallout of either of these two US government companies failing would be enormous. Their bonds are held by many banks and pension funds, and they are the foundation of the U.S. housing market. A spokesman at Charles Schwab and Company, Brad Sorenson, was quoted as saying "Allowing these entities to fail, or even to let things get to the point of it becoming difficult for them to get additional financing in order to continue their operations in the mortgage market would be ... devastating to the US, and indeed the global, financial markets."(1)

Belgian Bank Insurer Fortis predicts imminent US financial system meltdown

The Financial Telegraph of the Netherlands published a financial analysis on June 28 from the perspective of Fortis of Belgium, a major European bank insurer. The article nonchalantly predicts the bankruptcy of GM, Citibank, and some of the 6000 other banks that have low insurance coverage, and says that the company “expects a complete breakdown of the American financial markets within days or weeks.”(2)

What to do now?

Short term, consider moving dollar-based savings accounts into Euros to protect against a short-term free-fall dollar devaluation. See Alert 1a, Buying Euros, for more information.

For longer-term savings accounts, mutual fund investments, consider buying gold directly (see Alert 2, Buying Gold), or investing in rock-solid, audited, insured precious metal funds such as BMG Bullion Fund. If you have a movable pension fund, you can establish a self-directed IRA in which you have the ability to choose where you invest your money such as BMG Bullion Fund. (Please avoid New York City bank-related precious metal funds such as StreetTracks EFT, as the connection between your investment and the actual metals is less direct, and these banks are all in serious financial trouble.) Gold and other precious metals will still be volatile while the speculative vultures are still buying and selling them for short-term gains, but eventually they will be among the few safe investment havens.

If it isn't obvious already, don't buy or sell real estate. The prices are still plunging and there's a long way to go. Expect at least a 30% price drop and a market awash in bankruptcies. More than a million homes reached bankruptcy status in June, 2008.

Wild Card: The U.S., Iran, and Israel

If the US and/or Israel attacks Iran, the world's 4th-largest oil exporter, Iran will probably stop all oil exportation, and has threatened to shut the Strait of Hormuz, stopping most of the world's oil shipments. If any of this transpires, the price of oil (followed closely by precious metals) will skyrocket and the dollar will be wallpaper.

References:

1. Rob Lever, Fannie, Freddie shares back from brink of meltdown, Agence France-Presse, July 11, 2008, reported by Yahoo News.

2. American 'Meltdown' is the Reason for the Money Injection by Fortis, Financial Telegraph, June 28,2008

Alerts

The Storm Rages On

The Storm Has Begun, Takeover of Freddie and Fannie

The Calm Before The Storm

Jedi Mind Tricks

The Meltdown Continues, IndyMac, $100,000 FDIC Limit

The Meltdown Has Begun

Welcome, predictions, Bernanke Bluster

Tips on Buying Gold

Avoid Foreclosure

Standard Disclaimer: The information above, Bad Moon Rising Alerts, and the Bad Moon Rising Survival Guides do not constitute financial advice, but are condensations and distillations of the work of others and a few words of what I believe to be common sense. Please seek out an independent licensed accountant or financial advisor to review the information and references I have provided as well as their own expert knowledge, in order to tailor a financial plan to your circumstances. I cannot be held responsible for the consequences of decisions made based on the information I provide. If I suggest that you stop playing the lottery to save money and your number comes up, don't blame me.

©Graphics, Web design, and content Copyright 2003-2008 by Jonathan L. Campbell.

Jonathan Campbell
Research for Empowerment and Survival
43 Boynton Street, S. 2R
Boston, MA 02130-3263
EconomicAlert: http://www.cqs.com/economicalert

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