CFC was saved today by the actions of the Fed lowering the discount rate by 50 basis points. However, this is just a short term fix for CFC and the bank mortgage lenders. The lowering of the discount rate allows CFC to finance its originations with the Fed and not use the commercial paper market. It was reported that the commercial paper market was charging CFC 12% for 30 day paper, which we reported here questioned how long could CFC survive at that rate. Although CFC can originate, they cannot securitize in the secondary market and must hold the new loans that are not agency paper on its books.
So if CFC must hold the new loans on its books, you will see a expansion of assets on CFC balance sheet, offset by a liability of the value of the new loan. the question still remains how big will the Fed let CFC's balance sheet get and who will buy the securitized new loans?
Well it now seems CFC has friends in high places and the Fed went Bear hunting on Friday morning.
The move was timed by the Fed to take place before the market opened to wipe out speculators that had shorted GS and CFC. At exactly 9:30 am EST the speculators that had shorted GS and CFC positions were marked to market, liquidated and forced margin calls were exercised against their collateral forcing them out of business for good.
We guess if there is a moral in this story it is that don't go bear hunting with the Fed.