Analyst Predicts Financial Tsunami

The Hong Kong Hang Seng Stock Index has dropped below the critical level of 20,000 points, closing at 19,933 points on Friday. And by looking at the current global economy, the Hang Seng Index does not look to get better any time soon. It is important to note that the Federal Reserve’s handling of Fannie Mae and Freddie Mac will have a big impact on the global markets. If handled improperly, it could become a “financial tsunami,” says U.S. bonds guru, Bill Gross.

The U.S. subprime mortgage crisis has become a global financial crisis. The Fed has tried to do what it can to save the market. It injected over $14 billion into the banking system last year alone. “Fannie and Freddie are still a problem, and we don’t know what other problems are out there.” Secretary for Financial Services and the Treasury, professor K.C. Chan said in an interview with MingPao yesterday.

When the slowdown in the housing markets began to affect Fannie and Freddie in July, in an unprecedented move, the Fed injected over $300 billion to rescue the housing market. The Fed has not stepped up to take over Fannie and Freddie. Bill Gross publicly asked the Fed to step up and take over Fannie and Freddie. He thinks that, not only does the Fed have to save Fannie and Freddie, but it also has to bail out the people who cannot afford to pay their mortgages. That will prevent a chain reaction in which all investments values would fall due to the current housing crisis. He warned that “a camp fire would spread out to the entire forest; a bear market would lead to a financial tsunami.” He also said that he would never buy bonds sold by Fannie and Freddie again.

In fact, in order to stay above water, both Fannie and Freddie have to sell at least $225 billion in bonds this month. The market is paying close attention as to whether Fannie and Freddie can sell that amount. Bill Gross warned that if no one wants to buy the bonds sold by Fannie and Freddie, then we would see an unprecedented chain reaction on the global market.

Not only would this impact the U.S. financial market, it would also have a big impact on other global financial institutions. Many banks around the world own both Fannie and Freddie bonds. It emerged that several banks in China own both Fannie and Freddie bonds worth up to $370 billion. If Fannie and Freddie fail, it would create a global financial tsunami.

This has created a moral debate on the saving of both Fannie and Freddie. Some argue that it would set a precedent on government intervention, as supposed to the notion of the long practiced, free market, hands off approach practiced by the U.S. In reality, if the Fed does not take over both Fannie and Freddie, it would be game over for all of us. What is Treasury Secretary Henry Paulson waiting for? He understands this issue better than anyone else. Anyway, Bill Gross’ “financial tsunami” statement is not out of line. Individual investors should stay out of the market. Hong Kong must pay close attention, and make sure that banks are in good shape.