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As We Posted Last Week CFC Debt Weighs On Market

May 5, 2008 10:29 PM

Two reasons the market was pressured today, well make that three. One, we had to clear Friday’s high on the Dow, which it rejected. Secondly, oil was going crazy. Third, financials were under pressure as talk of Bank of America possibly letting CFC debt go into default, and possibly even backing away from the takeover had people rattled. This is a big deal, IMO. CFC holds 25% of all mortgages in the U.S. If BAC cancels the bid, CFC would almost certainly have to file for bankruptcy protection. If they go bankrupt, there will be another round of turmoil in the credit markets. I suspect the Fed cannot allow this to happen and they will apply whatever incentive and pressure they can for BAC to follow through on the takeover. But if BAC is smart, they will bid near zero for the stock and then honor the debt. That appears to be best case scenario for the market as then another “bullet” would have been avoided - for now.

As I have mentioned MANY times, I do not believe this crisis is even close to over. If home values do not stop falling, many more loans will go into default and could threaten financial stability. Considering that i do not believe incomes support home values on average, this seems inevitable. That is why the Fed is hoping for time, and is devaluing the currency as fast as they can, regardless of the nonsense about a “strong dollar policy”.  I mentioned over a year ago, there is one, and only one way out of this mess, and that is to create massive inflation, erode the real value of the mortgages, and hope for time. And this is exactly what they are doing.

Written by Tom@StockBlade.com · Filed Under BAC 

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