Easy go, easy come. Yesterday the weather was cold and windy here in Elwood. There was even rain in the air. It was a day, not necessarily to forget, but certainly not one to remember.

There was also bad weather on the financial markets. Many described it as a financial hurricane. Others thought it was more like a financial tsunami. No one seems to have described it as a financial vortex, which is a shame.

Yesterday must have been so bad that Australian Financial Review (AFR) dispatched three journalists to Ryan’s Bar in Sydney to get the scoop on what was happening. The result generated Pulitzer Prize winning copy.

“It was #@*!$%^ carnage. We got absolutely smoked. My head is smashed. I need a drink.” Wow! Those were the words of a 23-year old “broker” from JPMorgan. This “broker” has probably seen a thing or two in his 1 or 2 years in the markets. He’s probably been buying up bank shares at “cheap” prices all the way along.

Bank Shares Soar
They were super cheap yesterday. But a little more expensive today. Most of the banks are up by at least 5% this morning. Macquarie Bank is up over 30%. So, what has changed since yesterday?

For a start it’s a beautiful day outside. The sun is shining, the birds are inaudible above the sound of the traffic racing by on Brighton Road. On top of that governments across the world have been springing into action.

Late yesterday the UK government approved a suspension of the takeover rules that enabled LloydsTSB to acquire the UK’s largest mortgage lender HBOS (owner of BankWest in Perth). Another part of the deal is that the merged bank has to promise to lend more money to first-home buyers.

Do we really need to mention that irresponsible lending is part of the reason for the current position of world markets?

Short Selling Banned
On top of that the UK Financial Services Authority - similar to ASIC - invoked a ban on short selling the shares of banks. It doesn’t stop there because now the SEC in the US has also placed a ban on short-selling.

Another instance of ignoring the cause and attacking the effect.

The lines between so-called capitalist economies and command economies appear to be blurring by the day. After keeping quiet through all this, the Chinese government have also had to step in to support their banking system.

But we would expect that, so it shouldn’t come as a surprise. According to the China Daily, the “state-owned investment agency Central Huijin announced it would buy shares of three major Chinese banks.”

The government has also scrapped stamp duty on share purchases in an effort to encourage buying of shares.

The New Free Marketeers
Not everyone is ready to jump on the intervening bandwagon. Who could it be that is taking a firm stand against using taxpayer funds to prop up private enterprise? The Canadians maybe. Or the Germans. No, the Russians.

Russian prime minister Vladimir Putin has told the Russian news agency that his government will not use the “Reserve Fund or the National Prosperity Fund to these ends.”

Of course it hasn’t all been plain selling in Russia this week with its stock exchange closing twice and the oil price falling to under USD$100 a barrel. But apart from that, Putin seems keen to show the West how not to get involved - in financial markets anyway.

Future Fund Beefs Up Debt Investment Strategy
The only other thing we noticed this morning while flicking through the AFR was a job advertisement to work at the Future Fund as a “Senior Analyst - Debt & Alternatives.”

Apparently the Future Fund has developed its investment strategy so that it has a “need to expand the Debt and Alternatives team.” This new role would join a team that will “focus on hedge fund strategies.”

You will recall that the Future Fund was set up to retain the federal government’s remaining holding of Telstra shares. It is a quasi-government body that will predominantly be used to fund unfunded government pension funds.

Maybe when the US government decided to take over Freddie, Fannie and AIG it was merely following the Australian model of state owned funds management.

Freddie and Fannie May Be Debt-Ridden,
But Their Bonds Are Worth Holding

Central banks are notorious for their ill-timed investments. The latest such trade was conducted by several Chinese banks in August as they reduced their combined positions in Fannie Mae and Freddie Mac debt.

Erring on the side of caution, you can’t blame China’s banks for selling Fannie and Freddie debt. After all, many of these banks have already lost billions betting on global stocks recently, including U.S. banks.

But the timing of the sale is just dead-wrong. Right now, both lenders have the implicit U.S. government guarantee that Freddie and Fannie won’t fail. Plus, Freddie and Fannie have some of the richest spreads versus Treasury bonds in history. Fannie and Freddie bonds have gained 3% in 2008.

If anything, now is the time to buy, not sell, Fannie and Freddie debt. PIMCO is probably the savviest bond investor in the world with more than US$800 billion in assets. Recently, PIMCO has been aggressively accumulating mortgage-backed securities.

Last week, PIMCO announced they may be creating a private fund to buy the highest quality mortgage-backed securities.

China’s recent paring of U.S. GSE (Government Sponsored Enterprises) holdings is not significant considering all positions are valued at less than US$13 billion.

Both mortgage lenders have issued hundreds of billions of dollars in fixed-income securities over the years. China’s slicing of US$23.3 billion on December 31 to US$12.7 billion as of August 25 won’t affect GSE pricing in a big way. The figure is not big enough.

Global central banks - including several Asian and Middle Eastern banks - have a bad track record making investments lately.

Sovereign Wealth Funds, or SWFs, have been aggressively buying distressed U.S. and European financial services companies since the sub-prime market exploded in August 2007. These guys have already lost billions on paper since last fall.

Central banks are also notorious for making the worst investment decisions at the wrong time. Over the last decade a host of central banks have dumped gold just as prices bottomed in the late 1990s.

Are Chinese banks right to reduce GSE holdings this summer? My guess is probably not. I’ll bet on PIMCO.

Every other month, it seems, global markets are teetering on the brink of panic. Then central banks step in to calm investors. They inject the credit markets with more money while investors scramble to reposition their portfolios.

It’s been nearly an impossible environment to make money in recently too. Volatility is intense and every asset class is now heading into the basement since commodities peaked in early July. Only U.S. stocks are showing gains since July 15.

Over the last 12 months we’ve seen four global panics triggered by solvency concerns revolving around Bear Stearns Cos., Northern Rock plc, Lehman Brothers, Countrywide Credit, General Motors and, since July, Fannie Mae and Freddie Mac.

On Tuesday, former IMF chief economist, Ken Rogoff, declared a big financial institution will collapse before the credit crisis draws to a conclusion.

This never-ending saga of financial crises has morphed into a monster. And, like a bad dream, it just doesn’t go away.

The latest debacle shaking global markets upside down are mortgage giants Fannie and Freddie. Combined, they guarantee more than US$5 trillion worth of U.S. mortgages. Without them, there probably wouldn’t be much of a mortgage market.

Until the housing market finally establishes a bottom, Fannie and Freddie are going to remain under pressure. Balance sheets at both companies continue to hemorrhage while home values plunge and both mortgage and refinance application numbers tank. Home prices are now down 10% year-over-year and mortgage and refinance applications are down a heavy 37% and 44%, respectively. Those figures are outright bearish and suggest investors have run out of patience with Fannie and Freddie.

Instead of playing political football and jockeying around the bailout issue, the Treasury and Congress should just bailout Fannie Mae and Freddie Mac. It’s inevitable anyway. I think the Feds are waiting for the housing market to bottom before officially entering the mortgage business. No dice.

We already know Secretary Treasury Paulson has given the markets an implicit guarantee that the federal government won’t allow these giants to fail.

So if that’s the case, just bail them out already! Shareholders will get wiped-out in the process and the United States will officially be in the mortgage business.

Credit markets remain on edge. Stocks worldwide are plunging, non-government bond markets are reeling and most commodities remain in a vicious downtrend since hitting multi-decade highs in July.

Deflation, not inflation, is now the markets’ primary focus. Housing woes are adding pressure to deflationary trends in the United States and now, Europe. Again, the main threat since July to global markets is deflation.

The federal government will bailout Fannie Mae and Freddie Mac with taxpayers naturally footing most, if not all, of the bill. If the Feds don’t orchestrate a bailout soon, there’s a good chance markets will crash and government bond yields will plunge. It’s that serious.

As we have seen twice in the past week, sudden, sharp falls in the oil price produces sharp rises on Wall Street (especially in airline shares).

Sharp rebounds see markets swoon, and when added to financial worries, it’s a double swoon.

When, as we saw Wednesday night there’s a sharp fall in oil and a hint of good news from a bank, American investors rejoice: ignoring the reality of a sharp rise in inflation. That was repeated again on Thursday night as oil fell further to be more than 10% down from its all time closing highs. It finished just under $US130 a barrel in New York.

The AMP’s Dr Shane Oliver says that the oil price is now critical to the outlook for shares.

While the long term trend in the oil price will likely remain up, current prices are not justified by oil supply and demand and are likely to fall back - probably to around $US100 a barrel - in the next 6 months.

But he warns that if the oil price continues to surge shares will remain under pressure. Iran and hurricanes are the wildcards.

Oil is the key

The big slump in shares from their highs in October/November last year to their lows in March this year was driven primarily by the credit crunch.

But the continued surge in the oil price has played a major role in the slump in shares since mid-May which has now taken them below their March lows.

The dramatic rise in oil prices is now a major threat to economic growth.

It has also made the credit crunch worse by pushing up inflation and hence market interest rates which has offset the US Federal Reserve’s interest rate cuts, made global central banks more hawkish, and increased the risk of debt defaults.

While US Treasury moves to support Fannie Mae and Freddie Mac should help provide a bounce for shares, if the oil price doesn’t turn around soon a global recession will become a certainty and shares will fall further. But if the oil price does manage to stabilise and start heading back to earth then shares will likely be given a huge boost.

Fundamentals support a rising trend in oil price

For many years our view has been that the rise in oil prices has been justified by fundamental supply and demand considerations.

As countries like China & India industrialise (and in the process use up more energy) the supply of oil is struggling to keep up.

For China and India, their per capita oil usage has been rapidly rising, but even though this has been occurring from a low base the huge population of both countries has meant a massive rise in oil demand, with China now accounting for around 70% of the annual increase in global oil demand.

And this is set to continue. E.g., if per capita oil consumption in China and India were to rise to just half of Australian levels it would imply an extra 40 million barrels per day in global oil demand (which is currently 86 million barrels a day). At the same time the sources of cheap easily extractable oil are drying up.

As a result the long term trend in the oil price is being driven by demand and supply factors and will remain up.

But has it become a bubble in the short term?

Over the last six to 12 months the rise in the oil price has become exponential, even though the supply and demand situation hasn’t really changed that much.

This suggests it may be starting to run ahead of fundamentals. Speculative manias tend to have several key elements:

• Easy money and low interest rates;
• A fundamental dislocation which underpins initial price gains and provides enthusiasm for the eventual mania;
• A means to allow mass speculation; and
• The extrapolation of past price gains into the future.

Many of these are now arguably present in the case of oil.

• The cut in US interest rates has provided the easy money backdrop and the associated fall in the $US has increased demand for commodities as a hedge against dollar weakness. Falling share markets have also encouraged investment flows into commodities.
• The China story and all the talk about “Peak Oil” has helped provide a fundamental justification.
• The advent of commodity funds investing into futures has provided a means to easily invest in commodities.
• These have up to 74% benchmark weights in energy.
• Analysts have been falling over themselves trying to come up with ever higher predictions for the oil price. Expectations of $US150 to $US200 are now common.

Certainly, the surge in the oil price is starting to look like past bubbles such as the bubble in Japanese shares in the late 1980s and the tech bubble in the late 1990s, i.e. prices rise steadily for many years justified by fundamentals only to then start rising exponentially. (See the next chart).

Of course, the argument that the surge in the oil price has become speculative has been subject to much debate.

Some have argued that it’s hard to find definitive proof of speculative involvement.

Measures of speculative positioning in oil and sentiment are mixed.

But then again it’s always hard to prove that price surges are due to speculative bubbles.

Secondly, it’s been argued that there can’t really be a speculative mania in oil because if there were then demand would dry up, production would surge and stockpiles would go through the roof burning the speculators and this hasn’t happened.

However, against this it may be the case that demand is just responding with a long lag. Supply growth may be struggling to keep up with demand but the situation has not changed so much over the last year to justify a doubling in the oil price.

There is also an argument that futures pricing plays a much bigger role in the setting of spot oil prices than in the case of other commodities because Saudi Arabia actually uses oil futures prices to set sale contract prices

The chart below also suggests that the exponential rise in oil prices this year has disconnected from Chinese oil demand.

Over the last decade China’s oil imports have steadily increased and this has remained the case and yet the crude oil price has gone exponential over the last year.

Signs of an oil price correction on the way

Bubble or not, it’s looking increasingly likely that the oil price has gotten ahead of itself in the short term and the fundamental backdrop is starting to move against oil prices:

First, for the rich world it has become increasingly obvious that the “choke point” has been reached.

This particularly relates to the speed with which the oil price rises. Oil prices rose dramatically over the 1998-2007 period but the 3 steps forward 1 back process gave businesses and consumers time to get used to it.

The doubling over the last year is a lot different and has come at a time when key economies are already struggling on the back of the credit crunch. This is showing up in falling oil demand in these countries.

Second, there are now numerous indications that the same will occur in the emerging world.

Slower growth in rich countries is leading to a slowdown in emerging world exports.

This is clearly evident in China where export growth has slowed dramatically.

Monetary tightening in response to rising inflation will lead to slower demand growth ahead in these countries, particularly in Asia where inflation has become more of a problem.

As a result, the OECD’s leading indicator for developing countries has slowed significantly.

Share market collapses in these countries are also warning of much slower growth ahead.

For example, Chinese and Indian shares have fallen 56% and 38% respectively.

Taken together with now rising fuel prices in such countries this is likely to start slowing emerging world fuel demand over the year ahead.

Of course, a risk premium of $US10-15 a barrel for the threat of conflict between Israel & Iran has been priced into oil. If Israel has a military fight with Iran the sky is the limit for the oil price in the short term.

Iran produces 4.3 million barrels a day of which it exports 2.5. If this is taken out it will use up all of OPEC’s spare capacity.

How this unfolds is anyone’s guess, but assuming commonsense prevails then the risk premium should fade over the next few months.

The other wild card is the US hurricane season, which could also adversely impact short term oil supply.

With speculators now playing a big role in the oil price, the very short term outlook is hard to predict.

The oil price could easily spike higher. But the bottom line is that barring a major disruption to oil supplies, at some point over the next six months the oil price is likely to fall sharply, probably to around $US100 a barrel, in response to weaker oil demand.

To the extent this is driven by weaker growth, industrial commodity prices generally will also be vulnerable as will resources shares.

Oil is the factor ‘X’ for shares

It looks increasingly likely that the surge in oil prices is this year’s factor ‘X’ for the global economy and shares.

Where oil prices go from here is critical. We remain of the view that while shares are due for a short term bounce (and US Government support for Fannie Mae and Freddie Mac may help provide this) the next few months are likely to be rough.

But our view remains that shares will rally hard in the fourth quarter on the back of very attractive valuations once the news flow starts to improve. 

The things to look for to confirm this is on track would be:

• A sharp and sustained fall in the oil price;
• A fall in inflation worries as represented in bond yields;
• A relaxation in central bank hawkishness;
• A slowing in US house price falls; and
• A sustained improvement in credit markets.

Copyright Australasian Investment Review.
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US mortgage giants, Fannie Mae and Freddie Mac are to be supported by the US Government to stop their possible collapse or a loss of confidence in them badly damaging the US housing sector,economy and financial system. In a dramatic statement at around 8 am this morning, Sydney time, US Treasury Secretary , Hank Paulson indicated he would seek blanket authority from the US Congress to aid the two struggling mortgage giants. The move came only hours before Freddie Mac had been due to sell $US3 billion worth of short-term debt, a move that would have seen if the market had wanted to support them.  It is now clear there was every opportunity that the issue would have failed, thereby questioning the credit worthiness of the USA itself because debt from the two mortgage groups is regarded as being tantamount to US sovereign debt. Paulson will ask the US Congress for a “temporary” increase of the companies’ lines of credit with the Treasury from the current $US2.25 billion each, and the right to buy equity “if needed.”  The plan, if it is given congressional approval, would give Paulson power to buy an unspecified amount of stock in Fannie Mae and Freddie Mac. A third element of the proposal would give the Federal Reserve a “consultative role” overseeing the companies’ capital requirements.  The Fed also announced it will let the companies borrow directly from the Fed at the same discount rate as commercial banks. The rescue and support package is similar to the way the Fed, Treasury and others bailed out Bear Stearns in March and stablised financial markets. US media reports had said over the weekend that the US Treasury would issue a statement of support for both groups this morning, before trading in Tokyo opens. There were reports in two News Corp papers on either side of the Atlantic of a possible support action from the US Government. The London Times reported that a $US15 billion injection of capital from the US Government was being considered among a list of possible options, while the Wall Street Journal reported on the weekend that a government support package could be announced Sunday night or early Monday in time to support the bond issue by Freddie Mac. The Journal reported that the US Government wanted to make sure the money helped the mortgage markets and not shareholders in both quasi-US groups.  The debt of the two mortgage giants is considered to be on the same ranking as the US Government debt in the minds of the market. So any problems with it could hurt the overall US debt markets. A move to buy the debt to be sold later tonight, by the Treasury or by the Fed, could send a support signal, like they did with the Bear Stearns rescue in March. That was started on a Thursday night and finished the following Sunday evening while 60 Minutes was airing in the US on CBS, but before the Tokyo stock market started trading Monday morning (Australia didn’t matter). Certainly Russia, which holds $US100 billion of US Government agency debts in its official reserves (including Freddie Mac and Fannie Mae) considers the agency debt as on a par with the debt of the US Government, according to a statement from the Russian Finance Ministry Friday and reported on Reuters. Other countries (China?) would have big holdings as well and they would not expecting a sharp rise in losses on that debt to the point where it raised questions about its backing. The Freddie Mac and Fannie Mae problems raise enormous questions about the credit worthiness of the US and there’s a geo-political side to the whole situation. The US can’t contemplate letting the two companies go broke: it would be tantamount to the US defaulting. Nor can the Bush Government or any government takeover over both mortgage groups: the $US5 trillion in dent would double the US national debt (but probably legitimise a grey area) and hurt the value of the dollar and trigger an enormous bout of financial instability.

Even though a takeover would see trillions in assets added to the US Government’s books, the markets would ignore that. It could see the US Government become the biggest loser from the subprime mess and credit crunch.

That they have gone half the way indicates how worried the uS is about the stability of the system, with Freddie and Fannie the focal points.

The fears about Freddie Mac and Fannie Mae is that they do not have enough capital to handle any sizeable loss in coming months or years from falling US house prices. Some commentators argue that if their mortgages were marked down to fair value (like many banks have to do), then they might not be solvent. 

Both groups said Friday they had enough capital but there were reports that Goldman Sachs was looking to raise money for one of the duo’s capital base and not new debt.

If the latest help proposals from the US Congress for struggling US homeowners facing foreclosure are to work then Fannie Mae and Freddie Mac will have to have robust capital bases because they will be required to play a major part in supporting the tottering US mortgage market.

US regulators (and the two firms themselves) say the duo have enough capital

“They are adequately capitalized, holding capital well in excess of” the requirements, the Office of Federal Housing Enterprise Oversight, said in a statement quoted on Bloomberg.” They have large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.”

According to broking estimates, also quoted on Bloomberg, Fannie Mae and Freddie Mac would have to post pre-tax losses and write-downs of about $US77 billion before the US would be compelled to start a rescue. The companies have already raised $US20 billion to cover losses from the highest delinquency rates on housing in 30 years.

According to the two companies they lower interest rates on the 30-year fixed rate mortgages they guarantee, reducing the costs of home ownership for many Americans.

They buy mortgages from lenders and repackage them as securities for investors: this is securitization and it’s on the nose everywhere because of the credit crunch.

But in the US these companies are much more deeply involved in the housing finance sector because of their longevity and quasi-US Government status. They have a long history of securitising mortgages, even though bad times in the past. The home loan securitisation markets in countries like Australia and the UK are much younger and have less resilience. 

That’s why they have been shutdown by the credit crunch and the collapse or departure from the sector of leading players.

Fannie Mae and Freddie Mac provide lenders more funds to make further loans. Their automated underwriting systems have standardized mortgage lending and evened out regional US credit differences. They have become essential to the recycling of funds into US housing.

That’s why they have been caught by the credit crunch and subprime morass. Even though they are chartered by the US Congress, that didn’t prevent them from making many of the same mistakes that privately- owned funders did.

On top of that the two groups’ holdings of existing mortgages and securities are so large that they have continued to be battered by the 14-15% drop in US home prices in the past year.

That US Government charter, but private ownership, has placed them in a grey area of being neither wholly Government-owned, or wholly private: their shares trade on the New York Stock Exchange. That’s why they are called “Quasi-Government Sponsored Enterprises”

Their charters entitle them to $US2.5 billion lines of credit to the Treasury that each firm could draw on in an emergency, helping to add to the impression of government approval and support.

The US Government could very easily give them access to that line of credit, or merely increase it to show support.

This assumption by financial markets that the government would bail them out in a crisis means Fannie Mae and Freddie Mac can borrow more cheaply than purely private financial institutions.

At the same time, the companies are limited from lending directly to home buyers or from pursuing any other business line than mortgage finance. There are also upper limits to the size of mortgages they can buy.

Fannie Mae was originally called the Federal National Mortgage Association and was created in 1938 as part of a campaign to expand the US secondary mortgage market and boost homeownership as the country emerged from the Depression. The US Congress launched Freddie Mac, originally the Federal Home Loan Mortgage Corp, in 1970 to further expand home loan finance.

Stockmarkets are in for a very nervy week after the failure of two banks on Friday night: one in Denmark and one in the US and the worries about the future of the two giants of American mortgage finance, Fannie Mae and Freddie Mac. The support for the two US mortgage giants by the US Government and Fed, should help calm nerves today and allow the market to work out the impact and what happens next. Everything that happens this week will spring for just how much support the US Government can give to these two central figures in the US housing crisis. They control $US5 trillion of debt in various forms, have trillions in assets, and are simply too big to fail. The seizing of the failure of the IndyMac mortgage bank in California was the largest US bank failure for 15 years or more. It is in fact the second biggest failure in US history with losses estimated in preliminary reports up to $US8 billion.  There is around $1 billion in uninsured deposits: shareholder funds have been destroyed. It is going to further damage confidence in the huge Californian economy and housing market which is one of the worst affected from the subprime collapse. While Asian markets, including Australia finished higher on Friday, that will not be the case today as we’ll catch up to the very nervy trading Friday across Europe and the US. On top of these financial worries, oil hit a new high Friday in US trading and there were concerns about the health of a British financial conglomerate. Our optimism, which was driven by resource stocks, offset further weakness in banks on Friday. That will not persist today. The futures market was signalling a 1.5% drop here today after Wall Street fell by well over 1% on Friday night (the losses early on as Freddie Mac and Fannie Mae shares plunged in early trading, were more than double that). So it’s no wonder that the key global index, the MSCI World Index is now down 20% from its October record and nestling with the bears in Australia, parts of Asia, the US and Europe. The MSCI World Index tracks 1,742 companies in 23 developed markets, lost 1.4% on Friday. It fell 12% in the first half of the year (the steepest since 1982) and is now 20.3% off its October 31 high. The UK market became the eighth of the world’s 10 biggest equity markets to drop into a bear market since November. Markets in the US, Japan, China, France, Hong Kong, Germany and Australia have retreated more than 20% from their peaks because of the credit crunch, the US subprime mess and housing slump, rising inflation and more than $US400 billion in write-downs and losses from financial companies since the start of last year. During Friday’s roller-coaster session on Wall Street, the Dow dropped below the 11,000 level for the first time since July 2006. It trimmed that loss to close at 11,100.54. For the week, the Dow lost 1.4%, its fourth straight weekly decline; Nasdaq slipped 0.3% for the week, while the S&P 500 slid 1.9% into the arms of the bear. And American financial companies have led the slump into the bear market as the credit crunch, near recession and falling home values caused US homeowners to default on their mortgages. Leading bank, Wachovia Corp, Fannie Mae and investment bank, Lehman Brothers have lost 70% in value this year. UBS in Switzerland has been weak, as have Citigroup, the strong Australian banks, Bradford and Bingley, Barclays and UK home builders (along with their US counterparts).

Consumer companies (retailers, media companies, consumer durables, like groceries, car companies, home builders) are dependent on discretionary spending, which has taken a hammering in the US, Japan, Britain, Australia and Europe this year. 

That explains why the segment had the second-steepest decline among MSCI industries this year after financials. Rising inflation, high oil and petrol prices, plus surging food costs (and falling house prices) have hurt.

In Friday’s helter-skelter trading, all concerns about bear markets and international comparisons were moved to the sidelines as investors watched the shares in the two mortgage giants hammered, surge and then sold off again.

Fannie Mae tumbled 25% to $US9.98. Freddie Mac lost as much as 51% in early trading to $US3.89 before climbing back to $US7.20 in afternoon trading.

The rescue of IndyMac came late Friday afternoon in the US.

Lehman dropped 16% to $US14.47; Wachovia slumped 11% to $US11.75 and is had its biggest weekly decline in 25 years. It appointed a new CEO and reported a $US2.6 billion loss last week. It’s America’s 4th biggest commercial bank and home lender and it has been suffering because of the problems with subprime mortgages and the sharp fall in mortgage sales.

Freddie Mac is due to sell $US3 billion in debt Monday morning, US time: that will have to be supported, one way or another. An unsuccessful debt sale would imperil both groups.

We must remember that the Fed and US Treasury worked their rescue of Bear Stearns and its sale to JP Morgan on a Sunday, culminating in an announcement before trading started in Tokyo. This could be a similar situation today.

In Europe the Dow Jones Stoxx 600 Index fell to a three-year low and the London market entered a bear market.

The Stoxx 600 Index lost 2.7% to 270.36, the lowest since June 6, 2005. The index fell 3.3% last week, capping its sixth straight weekly drop.

Indexes retreated in all 18 western European markets except for Norway. France’s CAC 40 slid 3.1% and Germany’s DAX slipped 2.4%.

The FTSE 100 dropped 2.7%, pushing its slump from a June 2007 high to more than 20%. (Over 22%).

Rallies by commodity stocks have limited the drop in the UK. Seven of the top 10 stocks by market cap in London are resource stocks. In Australia its three, but we also have four banks and News Corp, all of which have been pounded in recent months.

That confidence won’t last today after the nervy trading in the US and Europe on Friday night.

The MSCI Asia-Pacific Index rose 0.4% on Friday. Japan’s Nikkei fell 0.2%, capping a fifth weekly decline. Most Asian benchmark indexes rose after the New York Times reported Friday that the US plan to bail out Freddie and Fannie. That story was later denied. China’s CSI 300 Index gained 7.7% last week ending a seven-week losing streak.

India’s Sensex 3.3% Friday but it still finished up for the first week in eight.