The Financial System Is Cracking

Things got worse in the credit crisis this week as the market speculated that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) could need a government bailout. Meanwhile, the housing market and the stock market are still in search of a bottom. Here are some of this week's highlights.

• Shares of Fannie Mae and Freddie Mac lost more than half their value this week as speculation that the mortgage giants will need a government bailout spooked the market. Earlier in the week the stocks sold off because investors fretted that a new accounting rule would force the companies to report enormous losses and have to raise tens of billions in new capital through equity offerings that would dilute shareholdings. Speculation deteriorated into questioning the companies' very ability to remain solvent. If Freddie and Fannie fail, the credit crisis will enter a far more troubling phase, to say the least.
  
• Wachovia (NYSE: WB) got itself a brand new CEO. Robert Steele, former U.S. Treasury and Goldman Sachs employee, took the helm earlier this week. The great thing about hiring new CEOs is that they are motivated to clean house because they can blame everything on the last guy and start fresh. Under the circumstances, I think Wachovia has one foot on another dividend cut and the other foot on a banana peel.
  
• Federal regulators of all shapes and hairlines appear to be converging on a consensus that major financial institutions should be subject to more federal regulation and scrutiny in the future. Both Treasury Secretary Paulson and Fed Chief Bernanke agreed this week that regulators need more authority over the beleaguered financial industry. I believe greater regulation is warranted, but I'm sure they'll go too far. Twenty years from now the Treasury secretary and the Fed chief will probably be meeting to discuss ways to ease federal regulations on the financial industry.
  
• Bank of America (NYSE: BAC) CEO Ken Lewis said this week, "I think we'll start a gradual recovery toward the middle of next year." It sounds so good when he says it. Another way of saying it is that it will be at least another year before the economy even begins an anemic recovery, but saying it like that might bum people out.
  
• The pending home sales index for May fell to its third-lowest level on record. A senior Wachovia economist said that any recovery in the housing market is likely to be weak at least through 2010. It looks like we're still searching for a bottom.

This week's news made it seem increasingly likely that the credit crisis will continue to get worse before it gets better. We could be in for a wild ride.

Related Foolishness:

• Freddie and Fannie in Free Fall
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