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Poole's comments have "Freddie" and "Fannie" getting spanked

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Morning comments from St. Louis Federal Reserve Bank President William Poole that "a crisis is possible" for Freddie Mac (NYSE:FRE) $50.75 -6.01% and Fannie Mae (NYSE:FNM) $59.45 -5.91% has early selling pressure marking both of these U.S. home financing companies to the downside.

Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets that would inflict considerable damage on the housing industry and the U.S. economy," Poole said at a symposium on the two companies, known as government-sponsored enterprises (GSEs).

Surprises that destabilize financial markets can and do occur with some frequency, Poole said. Because of the scale of the short-term debt obligations of Fannie Mae and Freddie Mac, a problem at either company would spread quickly, he said.

"A market crisis could become acute in a matter of days, or even hours," Poole said.

The regional Fed president recommended the U.S. government withdraw one of the advantages it gives Fannie Mae and Freddie Mac to help expand U.S. homeownership, which is the ability to lend either firm billions of dollars. This would make clear to markets that the U.S. government feels no obligation to guarantee the companies' debt.

Fannie Mae and Freddie Mac should also be required to hold greater capital as a cushion, Poole said.

"My sense is that the firms are vulnerable to nonquantifiable risks because their capital positions are so low," Poole added.

Poole's comments have sent some early "shockwaves" through the PHLX Home Construction Index (HGX.X) 204.30 -1.59% and Dow Jones Home Construction Index (DJUSBH) 291.41 -1.98%, as well as the financial sectors this morning as both FRE and FNM provide banking institutions the ability to sell existing mortgages to FRE and FNM to free up capital to further generate new mortgages.

Also weak are the S&P Banks Index (BIX.X) 266.15 -1.83%, on thought that any type of "problem" that might be around the corner for FRE or FNM based on Poole's comments could have banks with mortgage lending businesses not being as "liquid" in order to loan money for new mortgage originations.

Weekend comments from Secretary of State Colin Powell that U.S and Britain were within "striking distance" of winning 9 of 10 votes on the Security Council for their Iraq resolution, which could come as early as tomorrow, has Treasuries finding buyers again today, especially in the shorter-dated maturities. The 5- year March futures (fv03h) $115'040 +0.22% has embarked on a new contract high this morning, while its YIELD ($FVX.X) 2.505% is just off its session low of 2.482%. Driving price gains in the shorter-date maturities today is not only Colin Powell's comments, but I'm also seeing a strong jump in the June Fed Funds futures (ff03m) 99.01, which has the MARKET now looking for a 25- basis point rate cut (100 - 99.01 = 0.99%) in the next three months. Current Fed funds that are set by the Federal Reserve are 1.25%, with its next meeting scheduled for March 18.

The action in the Fed funds futures market may certainly have MARKET participants looking for a Fed rate cut at the next meeting, which comes very close to the recent U.S./Britian U.N weapons resolution, which gives Iraq until March 17 to disarm or face military consequences.

Currently, the Dow Industrials (INDU) 7,643 -1.24% trade lower by 96 points. The broader S&P 500 Index (SPX.X) 815 -1.6% is lower by 13 points and the narrower NASDAQ-100 Index (NDX.X) 969 -1.77% is lower by 17 points. On a broader scale, the NYSE Composite (NYA.X) 4,569 -1.63% is off 75 points and the NASDAQ Composite (COMPX) 1,285 -1.53% is lower by 20 points.

Sector action has been broadly negative this morning, with morning weakness leaders being the Airline Index (XAL.X) 29.09 -3.8%, Wireless Telecom (YLS.X) 48.4 -2.92%, Forest/Paper (FPP.X) 250 -2.6% and North American Telecom (XTC.X) 389 -2.79%.

Jeff Bailey

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