Friday Afternoon Is Bad News Time

If you’ve been paying attention, the Fed likes to release bad news after the markets close on friday afternoon. The past couple weeks, they’ve announced the failures of small regional banks.

Well today, they announced something just a little bit bigger – the government bailout/takeover of Fannie Mae and Freddie Mac, the two large mortgage finance guarantors. The markets have been expecting this for a while, but obviously not everyone was expecting it as their stock prices were $5.50 and $4 respectively when the market closed today. If everyone was expecting this, then those prices would have been a lot closer to zero.

This means the US taxpayers are now the guarantors of many of the mortgages that have been issued in recent years. Nobody really knows how much liability that the government/us taxpayers have taken on, but it’s certainly a huge number, way more than the savings and loan bailout of the late 80s.

I’ve been reading The Black Swan which talks about the impact of highly improbable events and how often they actually happen. Two years ago, if you had asked wall street insiders what the probability was of a bankruptcy of Fannie Mae and Freddie Mac, they’d have most certainly said less than 1%. And yet that is basically what we’ve just witnessed. It’s not technically a bankruptcy, but the equity has been wiped out and the company has been taken over by the only entity that can guaranty the debt – the US govt/taxpayers.

Some will argue that this is really good news, that this marks the bottom of the bear market in real estate and the final capitulation from which we can now start moving higher. I don’t think so. The small regional banks that the Fed’s been letting go under the past couple weeks will continue to go under and I think we’ve got at least another six months to a year of bad news in the real estate/mortgage business before it’s all over.

However, I’ve also heard that the smart money that was short real estate and mortgages for the past couple years has mostly closed out those shorts and is starting to put together significant capital to buy mortgages (maybe from the us, the taxpayers, via Fannie Mae and Freddie Mac – just as smart money did after the S&L bailout).

So, we are closer to the bottom than the top and although we’ve got more pain to work through, the smart money is starting to shift their posture.

How does this impact startup land and venture capital? Well from my vantage point, we’ve been largely spared for the past year. And I think we’ll muddle through this period better than many other sectors. But the capital markets are a mess and we should not expect a rosy exit environment any time soon. And we should expect to continue to get bad news on fridays after the market closes for a little while longer too.