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Date: September 10, 2008
Subject: G&G Financial Special Alert "US Treasury assumes $5.5 Trillion of debt"

This is
G&G Associates
Tax & Financial Consulting Services

The Government's action this weekend over Fannie Mae and Freddie Mac will have serious implications for your money.

Please read and comprehend to understand the latest dangers threatening you and your financial future…

Dear G&G Reader,

You know what really shocked me today? While in the gym working out I read across the TV, the stock market applauds on the Government’s decision to bail out Aunt Fannie and Uncle Freddie. Then I thought to myself, how foolish we are because people obviously have no recollection of history and surely no realization of debt and the devaluation of their dollars by the decision made this past Sunday. I tell you, whenever government workers have to work on a Sunday you need to be real cautious on what comes out of that meeting. But, what shocked me the most was the speed with which the bailout came.

Only a few short weeks ago Treasury Secretary Henry Paulson was sitting in front of Congress asking for unlimited authority (which in “Washington-ese” translates to money) to back Fannie Mae and Freddie Mac – the two largest mortgage guarantors in the country – possibly even the world. He justified this mind-boggling request by saying the more money they had access to, the less likely a bailout would be.

Well the Bush administration announced “Sunday” that the government would be taking over both Fannie Mae and Freddie Mac.

The capital reserves of these mortgage giants had fallen dangerously low – due to some “CREATIVE” accounting on their part as it turns out (this means fixing the books). And now the powers that be (that would be those that spend your tax dollars) have stepped in to restore order.

This move begs two important questions.

First, will they be able to restore order and confidence in such a mammoth market that has taken on so much water?

Second, and more importantly, what implications will this move have for you and your investments?

To answer the first question, while on the surface this move would appear to secure the nearly $5.5 trillion in outstanding mortgage debt, a deeper look suggests it might not. That's because of the way these giant mortgage beasts operate. Their main job was to pump money into the banking system that could be lent to prospective home buyers. They injected this capital into the system by buying mortgages that banks had already issued. They'd then securitize these debts and sell them to raise more capital.

BUT there's the catch. In a perfect world – or even a world that simply operates the way it's supposed to – the income from that securitized debt should come from borrowers repaying their loans. If those borrowers default on these loans, the terms of this takeover stipulate the government must guarantee them.


The reality of the situation will be that all this debt will actually end up being backed by the printing press of the U.S. Treasury. Further inflaming an inflationary, dollar-devaluing spiral that I promise will be attractive to NO ONE...Potentially undermining the very stabilizing effect that their action is supposed to have. How bad will it end up being? How much all this will cost? Let's take a quick look at the “MATH” on the situation.

Throwing Bad Money After Bad

Those in position to guess precisely how much the bailout will cost us, the taxpayers, won't hazard one at the moment. No surprise there. They'll be wearing down the erasers on their pencils for some time to come.
Earlier estimates suggested as much as $25 billion. But, given the recently revealed accounting “legerdemain” by these government sponsored entities, that number is likely way off.

The media reported this weekend that the total cost is “unknown.” They're rounding down to "tens of billions" of dollars. But it only takes a slightly deeper look to come up with a better, and more accurate guess...

Back when Hank was shaking his tin cup in front of Congress, begging for the rights to bail out these two behemoths, he argued a blank check would negate the need to actually use the money. But Congress covered their backsides and assumed, as usual, a bailout would be coming out of taxpayers’ pockets. In doing this they raised the U.S. debt ceiling – the amount of debt the government could pile up – by nearly a TRILLION DOLLARS.
THAT trillion dollars is theoretically what the government itself is expecting this bailout to cost.

So will it save the day? Will a government bailout create the illusion that these securities are safe to buy and sell? Will credit markets stabilize and go back to business as usual? Hard to say. But the answer to the second question – the impact on you – becomes infinitely more clear.

How A “Fire Hose” of Bailout Cash Could Wash Away the Purchasing Power of Your Dollar

Aiming a fire hose of cash at this current crisis will wreak absolute havoc on the dollar. On its purchasing power at home and the future value of all YOUR investments. {HINT: BUY GOLD & SILVER…}

And that means understanding currency markets today is absolutely vital for any serious investor. Because in a world of “fiat” dollars, cash that can be produced to cover any crisis like the one we're seeing right now, nothing backs the currencies you hold. There are no anchors to guarantee its value. Nothing except the “faith” of the government who issues it (your labor).

And what becomes even more important is the faith (or lack of it) that others have in those currencies. Opinions quickly change. Global events can create massive shifts in economic trends. And a host of other factors constantly churn to affect currencies around the world. And now all these factors have combined to create two major opportunities in the foreign currency markets. These opportunities are revealed in my G&G Investment Society paid newsletter service. You'll discover everything you need to know about...
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Despite unprecedented countermeasures, Washington has been unable to stem the tide

Yes, the Fed can inject hundreds of billions into the banking system. But if banks don't lend, the money goes nowhere. Sure, the Treasury can inject up to $200 billion of capital into Fannie and Freddie. But if their mortgage portfolio is full of holes, all that new capital goes down the drain.

And of course, the U.S. government has vast resources. But if the $49 trillion mountain of U.S. debts and the $180 trillion pile-up of U.S. derivatives are beginning to crumble, all those resources don't amount to more than a band-aid and a prayer.

The Most Important Lesson of All: As the U.S. Treasury Assumes Responsibility for $5.3 Trillion in Mortgages, It Places Its Own Borrowing Ability at Risk

The immediate reason the government decided not to wait any longer to bail out Freddie and Fannie was very simple: All over the world, investors were beginning to reject their bonds, refusing to lend them any more money. So the price of Fannie and Freddie bonds plunged, and the yields on those bonds went through the roof.

As a result, to borrow money, Fannie-Freddie had to pay higher and higher interest rates, far above the rates paid by the U.S. Treasury Department. And they had to pass those higher rates on to any homeowner taking out a new home loan, driving 30-year fixed-rate mortgages sharply higher as well.

Now, with the U.S. Treasury itself stepping in to directly guarantee Fannie-Freddie debts, Washington and Wall Street are hoping this rapidly deteriorating scenario will be reversed. They hope investors will flock back to Fannie and Freddie bonds. They hope investors will resume lending them money at a rate that's much closer to the Treasury rates. And they hope Fannie and Freddie will again be able to feed that low-cost money into the mortgage market just like they used to.

In other words, they hope the U.S. Treasury will lift up the credit of Aunt Fannie and Uncle Freddie.

There's just one “BIG” hitch in this rosy scenario: Fannie's and Freddie's mortgage obligations are just as big as the “TOTAL AMOUNT” of the outstanding Treasury debt. So, rather than the Treasury lifting up Fannie and Freddie, what about a scenario in which Fannie and Freddie drag down the U.S. Treasury?

To understand the magnitude of this dilemma, just look at the math again ...
- Mortgages owned or guaranteed by Fannie and Freddie: $5.3 trillion.
- Treasury securities outstanding as of March 31, according to the Fed's Flow of Funds (report page 87, pdf page 95): Also $5.3 trillion.

If Fannie's and Freddie's obligations were equivalent to 10% or even 20% of the U.S. Treasury debts, the idea that they could fit under the Treasury's "full faith and credit" umbrella might make sense. But that's not the situation we have here — Fannie's and Freddie's obligations are the equivalent of 100% of the Treasury's debts. And the politicians keep saying they are going to lower
And it's actually worse than that:

- Foreign investors, the most likely to dump their holdings if they lose confidence in the United States, hold an estimated 20% of the Fannie- and Freddie-backed mortgages outstanding. But ...
- Foreign investors own 52.7% of the Treasury securities outstanding (excluding those held by the Fed).

So based on the above stats, Treasury securities are actually more vulnerable to foreign selling than Fannie and Freddie bonds.

What happens if the international mistrust and fear afflicting Fannie and Freddie bonds infects U.S. Treasury bonds? Foreign investors would start dumping Treasury securities en masse. They'd drive Treasury rates sharply higher. And they'd wind up forcing Fannie and Freddie to pay much higher rates for their borrowings after all.

How will you know? Just watch the all-critical spread (difference) between the yield on Fannie-Freddie bonds, considered lower quality, and the yield on equivalent government bonds, considered high quality. Then consider these two possibilities:

- If that spread narrows mostly because Fannie and Freddie interest rates are coming down toward the level of the Treasury rates, fine. That means the immediate goal of the bailout is being achieved. BUT ...

- If the spread narrows mostly because Treasury rates are going up toward the level of Fannie's and Freddie's rates, that's not so fine. It not only means a failure to achieve the immediate goals, but it will also imply that the entire Fannie-Freddie bailout is backfiring on the Treasury.

Again, if you are not yet a member of the GGIS paid newsletter service...become an exclusive member of the G&G Investment Society subscription for USD ($79) today so I can keep you posted on what is happening. I guarantee you that you’ll not here the truth on CNN.


Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
877-817-6031 toll-free
866-361-3872 toll free fax

"A Prudent man foresees the difficulties ahead and prepares for them; the simpleton goes on blindly and suffers the consequences."
Proverbs 22:3 -- Living Proverbs

LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. G&G Associates gets paid a commission from a membership purchase at


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