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It looks like Halloween could be coming early to Wall Street this year. Thanks to the Treasury Department's announcement of a plan to bail out Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), it looks like the week could be starting off with pain for investors. That's because although their common and preferred stock will continue trading throughout the period that the government runs them, those issues will lose much of their value.

Much of the plan is consistent with what was leaked yesterday: firing the CEOs, replacing the boards, and putting the companies into conservatorship. The details that are new today have to do with the balance sheet restructuring that will take place. Bloomberg News reports the following key elements:

• Senior preferred stock. A new class of stock will be created that earns 10% dividends and gets access to the cash from these companies ahead of any other investors. Bloomberg wrote, "Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on the initial investments."
• Forced liquidation of mortgage holdings. The plan forces Fannie and Freddie to reduce their mortgage holdings dramatically over the next several years. Bloomberg reports, "As a condition for the assistance, Fannie and Freddie will have to reduce their holdings of mortgages and [mortgage-backed securities (MBS)]. The portfolios shall not exceed $850 billion as of December 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion."
• Quarterly capital injections. Depending on the net worth of Fannie and Freddie each quarter, Treasury will purchase more senior preferred. "The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks," according to Bloomberg.

In the last year, Washington has been shoveling our tax dollars out the door to bail out the money mistakes of multi-billionaires.

It cut interest rates from 5.25% to 2% ,which sent inflation soaring, yet mortgage rates remain higher than they were a year ago. It spent $29 billion to finance the merger of Bear Stearns and JPMorgan Chase & Co. (NYSE: JPM). And now it's about to spend as much as $800 billion to bailout a few huge investors who own mortgage-backed securities (MBS) issued by Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).

I find the reasons why this latest bailout shouldn't happen to be far more compelling than the reasons it should. (Here's some background on the mortgage giants.)

Here are five reasons I think this bailout shouldn't happen:

• Punishes the innocent and rewards the guilty. Why does it make sense for taxpayers -- most of whom are paying their mortgages on time and working hard to support their families despite declining real wages and higher costs -- be asked to dig into their pockets to clean up the errors of a few large institutional investors? Why not let the people who made the bad decisions pay for their own mistakes?

Now that we know Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are likely to cost taxpayers as much as $800 billion in a government bailout, I thought I'd provide some background on how we ended up in this mess. Here goes:

Fannie and Freddie buy mortgages, bundle them together, guarantee the payments, and sell them to investors. Between the two of them, they control 43% of the $12 trillion mortgage market -- or $5.2 trillion worth of mortgage-backed securities.

In the last year, with housing prices in free fall and foreclosures spiking, they've lost $14.9 billion between them -- about 0.3% of those assets. And at the end of June, they held $84 billion in capital -- $12 billion more than the $72 billion regulators require, according to Bloomberg News. Do these conditions warrant radical government action?

The government thinks that they do. As I posted, yesterday, Treasury Secretary Hank Paulson is likely to announce a plan to put Fannie and Freddie into conservatorship. The government will run them and will wipe out the value of the common shares and slash the value of their preferred stock.

Plus, it will dismiss the executives and board members of both firms while doling out as much as $800 billion -- spread out in chunks to be determined each quarter based on what the government thinks Fannie and Freddie need to keep functioning.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

The New York Times answered a question I had regarding how much striking International Association of Machinists (IAM) workers will get paid during their strike. The answer is that after the first two weeks, IAM workers take a huge pay cut. And though Boeing Inc. (NYSE: BA) will lose $100 million a day during the strike, striking may be more painful for workers.

The Times reports that "if the strike goes on for more than two weeks, union members will begin drawing $150 a week in strike pay. The typical pay for a union member is $27 an hour, or about $56,000 a year before overtime and bonuses."

If my understanding is right, the workers get no pay during the first two weeks of the strike and then take an 86% cut from their normal pay each week thereafter -- excluding overtime and bonuses. (This assumes that they normally make $1,077 a week for 52 weeks a year and that the $150 a week strike pay is pretax). With the high cost of food and gasoline these days, that kind of pay cut is going to hurt IAM members.

In what I feared might become a regular feature here, the Federal Deposit Insurance Corporation (FDIC) arranged for the takeover of the 11th failed bank of 2008 on Friday. As I posted, the FDIC likes to close banks on Friday after hours so they can reopen as branches of the acquiring bank on the following Monday morning. According to the Associated Press, the bank in question is Nevada's Silver State Bank.

Nevada State Bank of Las Vegas will take over the insured deposits of Silver State -- which had $2 billion in assets and $1.7 billion in deposits at the end of June. AP reports that "[Silver State's] branches will reopen Monday as offices of Nevada State Bank in Nevada and National Bank of Arizona in Arizona."

John McCain's son, Andrew, who is also CFO of his mom's beer distributorship, "sat on the boards of Silver State Bank and of its parent, Silver State Bancorp, starting in February but resigned in July citing 'personal reasons.' Andrew McCain also was a member of the bank's audit committee, responsible for oversight of the company's accounting," according to AP.

And now what could become history's biggest transfer of tax dollars to bail out bad lending begins. Last month Congress passed a bill that gave the Treasury Department $800 billion to bail out Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). And while it is unclear how much money will be used to bail them out, the general outlines of the soon-to-be-announced terms are becoming clearer than they were last night.

The New York Times and The Washington Post report on five key features as follows:

• Government bankruptcy. Fannie and Freddie will be taken under a conservatorship -- which is similar to a bankruptcy wherein a trustee operates the company so it can be fixed and ultimately sold back to public investors. The bailout would reduce the value of their common and preferred shares "to little or nothing," according to the Times.
• Taxpayers bailout defaulted mortgages. Some share of the $800 billion in taxpayer funds will be used to pay "any losses on mortgages [Fannie and Freddie] own or guarantee," according to the Times.
• Payouts on a quarterly basis depending on reported results. Treasury is trying to dribble the bailout over time. "Instead of giving each company a big capital infusion up front, the government could make quarterly injections as the companies' losses warrant. This would be an attempt to minimize the initial cost of the rescue," according to the Washington Post.

Three weeks after Barron's reported that a senior administration official -- my guess is it was Hank Paulson -- leaked details of a "rescue" plan for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- Bloomberg News reports that its implementation could be imminent. And in after-hours, shares of both companies are down 20%. If what Barron's reported -- wiping out common shareholders and slashing preferred dividends -- proves prescient, both stocks have further to tumble -- as in all the way to 0.

Bloomberg reports that Paulson met with Ben Bernanke and the CEOs of Fannie and Freddie and the head of the Federal Housing Finance Agency which oversees the two. And they have catering set for the entire weekend. I wonder what they are serving? I think PIMCO bond guru Bill Gross knows. He said, "There's probably a 95 percent chance that the moment that something will happen is Sunday or Saturday," according to Bloomberg.

Yesterday Gross called for the government to use $500 billion to bail out the real estate market. As I posted yesterday, this bailout is for the benefit of people like Gross and China's central bank which owns $340 billion worth of Fannie and Freddie mortgage-backed securities. If you happen to be among the holders of their common or preferred stock -- you are going to lose it all. As I suggested this morning, after the market lost 345 points yesterday, the government needed to announce another rescue plan by Sunday night.

At 3 a.m. Eastern Time tomorrow, 27,000 members of Boeing International Association of Machinists (IAM) will strike Boeing Inc. (NYSE: BA) according to Bloomberg News. As I posted this morning, IAM member anger is so deep that I was not surprised to learn that the federal mediator called in to find a solution could not avert a strike. The cost to Boeing is estimated to total $100 million a day -- reducing its earnings per share (EPS) by a penny a day.

IAM's website said, "Despite meeting late into the night and throughout the day, continued contract talks with the Boeing company did not address our issues," according to Bloomberg. And it quotes a Boeing spokesperson as saying, "We worked hard with the union and mediator. We pursued different options, but in the end we were too far apart to reach an agreement. We're open for further discussion but no talks are scheduled."

No details have emerged about whether Boeing changed the terms of its proposed contract. However, it appears likely that given the six points of disagreement about which I posted this morning, this strike could last a long time. Bloomberg quotes one Wall Street analyst who calculates that "a month-long strike would shave 31 cents a share off Boeing's EPS and cost $2.8 billion in lost revenue."

The Grand Old Party (GOP) is known for supporting big business. So it pays to elect Republicans to the White House, right? If you analyze the stock market performance under Republican and Democratic presidents, the answer is a resounding NO. Democratic presidents generate average stock market returns in excess of the risk-free rate of 10.69% -- roughly six times the 1.69% earned under Republican administrations.

Investopedia describes the research of Pedro Santa-Clara and Rossen Valkanov who analyzed the value-weighted returns on stocks between 1927 and 1998 under Democratic and Republican presidents. And they found that the excess returns of stocks over the risk-free rate of return -- as measured by the Center for Research into Securities Prices (CRSP) indexes versus three-month Treasury bill rates -- were far higher for Democratic presidents (10.69%) than for Republican ones (1.69%).

Of course, these are just long-term statistics. Under the last Democratic president, stocks rose an annual average of 17.4%. The current Republican White House occupant has presided over an average annual decline of 1.1% -- the S&P 500 was 1,342 when he took over and stands at 1,233 today -- the only president of either party of the last 11 to oversee a decline in stocks.

The New York Times reports that one of the co-authors of a very popular and influential management book, Reengineering the Corporation, has died. Michael Hammer, a former MIT professor, helped popularize the idea that managers should view their organizations as a "clean sheet of paper" and make them work more effectively for their customers. In the 1990s, the idea of Reengineering a company took over the thinking of managers around the world and led to billions of dollars worth of consulting work.

As it turns out, I have a professional connection to Hammer and his co-author, James A. Champy. Hammer taught me at MIT -- I took a course called Office Automation Systems from him in which he talked about the importance of imagining how a process would work if it could be re-imagined from scratch. And Champy hired me to work for the firm he co-founded with several MIT Sloan School professors -- Index Systems -- which grew dramatically after the Reengineering book was published. Index was ultimately acquired by Computer Sciences Corporation (NYSE: CSC).

Like many management ideas, its period of wild popularity lasted a few years and then faded. But what has stayed with me about the concept of Reengineering is the notion that a business needs to work not to satisfy the needs of its internal fiefdoms, but to make life better for its customers. And that is a legacy of which Hammer might be proud.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Computer Sciences Corp securities.

Another shoe is dropping in the ongoing credit collapse here in this nation of whiners. According to the New York Times, the default rate on so-called Leveraged Loans -- (a very strange name if you ask me since a loan is leverage) that refers to loans used to finance corporate takeovers -- climbed fast from 0.24% in August 2007 to 3.3% in August 2008.

The loans that have gone bad so far are not big ones -- they are more like the canary in the coal mine -- hinting at bigger problems to come. The Times says, "the loans that have gone bad have been concentrated in two industries - real estate and auto parts. S.& P. calculates that they have accounted for almost half of this year's defaults. Gambling has also had problems, as it turns out that there are too many casinos in some places."

The biggest loans have yet to default. But their collapse is inevitable. That's because banks are scrambling to raise capital and shore up their balance sheets. And the leveraged loans were structured to benefit from a lending market in which the name of the game was to keep from losing market share by making it ever easier to borrow. Thus the terms of leveraged loans were easy -- featuring, as the Times reported, a "flood of 'covenant-lite' and 'toggle-[Payment in Kind] PIK' loans."

Since China owns $1 trillion worth of U.S. Treasury bonds and $340 billion of mortgage-backed debt, when China gets a cold, the U.S. catches pneumonia. And -- as I posted -- when we think about the $800 billion bailout bazooka for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), we should remember that our money is going to help China out of an investment jam. But since we are at China's mercy, it may be self-help.

This comes to mind in reading the New York Times, which reports that China's central bank, the People's Bank of China, has kept its capital modest as it has gobbled up assets. Now it seeks a bailout from China's finance ministry. According to the Times, "those [$1 trillion worth of U.S.] investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank's tiny, [$3.2 billion] capital base [that] has not grown during the buying spree, despite private warnings from the IMF."

This need to replenish capital puts the U.S. economy in the middle of a bureaucratic battle on the other side of globe. The People's Bank wants a stronger yuan while the finance ministry wants a weaker yuan. The Times writes that "as the yuan slips in value, China's exports gain an edge over the goods of other countries." Treasury Secretary Paulson has been on the side of the People's Bank, advocating for a stronger yuan, so his push to bail out Fannie and Freddie can be seen as using U.S. taxpayer money to help it in its battle with China's finance ministry.

BusinessWeek reports that Boeing Inc.'s (NYSE: BA) 27,000 workers in the International Association of Machinists (IAM) union are eager to strike and they don't want to wait. Their anger is a microcosm of all those in America who feel that they have paid the price for globalization. Unfortunately, for Boeing and IAM, there is no contract that can relieve their anger.

BusinessWeek reveals six sources of IAM worker rage:

• Requiring workers to pay more of their health care costs - Boeing "is demanding that workers pick up more of the tab for their health-care costs. Some workers argue that a few visits to the hospital would instantly eat up any wage gains," according to BusinessWeek.
• Limiting death benefits for IAM members' families - Boeing wants to "limit death benefits for survivors, giving spouses of deceased Boeing workers a flat $4,000 payment instead of guaranteed monthly payments for life," according to BusinessWeek.
• Outsourcing - Workers believe that Boeing's decision to outsource much of the work on the 787 is responsible for production delays and that the program would have gone more smoothly if they had done more of the work in the U.S.

The U.S. market is driving the world -- whose stock indices plunged after yesterday's 345 Dow rout. But what does today bring? A chance for recovery or further devastation depending on whether reported economic statistics are better or worse than economists expect. Early reports are bad.

Here are the reports to watch, and what analysts had been expecting according to CNNMoney:

• Job cuts - Economists expected 75,000 lost jobs, but the 8:30am report was 84,000 lost jobs -- worse than expected.
• Unemployment rate - They had forecast the jobless rate to stay the same at 5.7%, but economists were wrong on this one too and unemployment rose to 6.1%.
• Hours worked - Economists anticipated the hour work week wouldn't change from July at 33.7, and they were right.
• Change in hourly earnings - Economists saw a 0.3% increase in the hourly wage, the same as July, but hourly wages rose 0.4%. Some may interpret this as inflationary pressure, but the increase is likely not enough to increase consumer spending either.

In general, these statistics suggest consumers are less able to spend money. Since initial numbers suggest things are worse than had been anticipated, stocks could plunge, causing policymakers to meet this weekend to try to hatch another plan to boost investor confidence for announcement on Sunday night.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Nobody ever knows why the stock market goes up or down every day. But that doesn't stop people from offering reasons. For instance, people used to say that if oil prices fell, stocks would rise. They said that if the government came to the rescue of troubled financial institutions, that would boost stocks. And they suggested that if the Fed cut interest rates more than expected, investors would buy stocks.

But today, The New York Times decided not to even offer an explanation. It suggested that nobody knows. And I agree with the Times -- I just disagree on all the other days when the media does offer an explanation for the daily movement of the stock market. Here are some of the discredited means of explaining today's move.

• Oil. Today oil fell $1.70 which normally makes stocks go up.
• Retail sales. As I posted, Wal-Mart Stores (NYSE: WMT) did well and so did other discount stores. But that's been true for a year so there is no market-moving news here.
• Jobless claims. The number of people claiming "unemployment benefits last week rose to 444,000, near a five-year high," according to the Times. But those numbers have been rising all year.