Bush's Change of Heart on Freddie, Fannie

On Friday President Bush blinked. You have to understand that ever since this administration took over, it tried to minimize the role of Fannie Mae (FNM - commentary - Cramer's Take) and Freddie Mac (FRE - commentary - Cramer's Take) and maximize the profits of the private-sector banks. It wanted to squeeze the government-sponsored mortgage giants hard and was doing so until the private-sector mortgage industry fell apart. Then the president realized that he needed Fannie and Freddie.

But one thing was clear: Until Friday, he didn't want anyone to think that this administration shared even the implicit guarantee that other presidents have given these two companies. He wanted people to know they were taking a risk when they bought Fannie or Freddie paper.

On Friday he had a change of heart. He had no choice. The crisis, which is going to claim most of America's banks, could not claim Fannie Mae or Freddie Mac without causing a second Great Depression. So with his statement that he supported these two, along with Treasury Secretary Henry Paulson's statement Sunday that the government will even buy stock in these outfits to save them, we all now know that the guarantee of their paper is more explicit than ever. This comes even as it would seem that the stock and maybe the preferred shares of the companies are more doomed than ever, because any cash infusion to buy stock must per se destroy the value of all the other securities, perhaps by massive dilution.

It was the president's change that stemmed the Friday decline even as people keep saying it was talks with the Fed, talks that hadn't even occurred, to lend Fannie and Freddie money.

I think that two things happen here. One is that Fannie and Freddie mortgage-backed paper is now a great buy because of how explicit the guarantee is. The second is that we are in a heap of trouble for the next few years, because the losses that Fannie and Freddie will incur will be horrendous until we get through the bad mortgage vintages (2005 to 2007).

So, let em rally, then put 'em out again, just like always.

At the time of publication, Cramer had no positions in stocks mentioned.

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