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A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

Thus far, all indications seem to lead us to believe that the Federal Reserve can solve economic problems by throwing massive amounts of money at it. From lowering interest rates from 1 percent from 4.25 percent this year, to putting billions of dollars into the commercial paper markets in order to stimulating lending, to the $700 billion financial bailout that’s constantly shifted from a package aimed squarely at aiding struggling financial institutions to helping out consumer debt firms as well. With all of this money being tossed around and historic, unprecedented actions taken place, is there anything at all left that the Federal Reserve can do to stop us from going into a recession? According to Kansas City Federal Reserve President Thomas Hoenig, no, no there is not.

“The Fed has done about as much as it can do, we might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively.” If Hoenig is right on the mark with that statement, and the recession continues to worsen, then there isn’t much more that the Fed can do to help us out of it. If and when it comes to it, we’re just going to have to suck it up and continue to tighten the belt.

Unfortunately that certainly isn’t the answer that automakers in the U.S. want to hear. Talks between congressional Democrats and the Bush administration seemed to be bottoming out recently. Democrats in the Senate insisted that they’ll try and allocate a portion of the bailout to pay for loans to the industry, but talks have been ground out to a stalemate, and they don’t have the votes to do so without that support. Republicans, for their part, believe that the $25 billion loan should actually come from a loan program previously approved to help them develop more fuel-efficient vehicles.

That could change when Obama takes office, however. The Bush administration recently told top lawmakers that half of the $700 billion bailout fund will not go anywhere before Obama takes office. Treasury Secretary Henry Paulson will leave $350 billion left over for when Obama takes office and his administration will be able to decide how the rest of it should be spent. You can be sure that this could change the state of negotiations to have that portion of the bailout.

With the second largest economy in the world heading into an official recession as well, it’s probably best to start preparing yourself now. If things continue to get worse, there won’t be much that the Fed, or anyone, will be able to do to stop it from running it’s course.

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A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

An often used saying when it comes to value investing is that you don’t want to “catch a falling knife.” Many times just when we think that stocks or commodities or any asset has been knocked down so far it can’t go any lower and buy in, it falls even further than we anticipated. The mortgage market is another area where experts and analysts think they’ve found a bottom, only to find out there really was no floor at all. Some funds, however, think they can make some money in this mess, and they know where to find it. With panic still ruling the markets and hedge funds eating huge losses left and right, one has to wonder where exactly they’re going to make their money in a sea of failure.

Look at Fortress Investment Group as an example. They had thought that bonds in the sector were attractively priced, and they made a huge bet trying to call the bottom. Unfortunately they ended up riding that bet down to yet another bottom, and their numbers show it. The fund had assets of about $940 million, and it’s down 47 percent in one portfolio, 42 percent in another, and 5 percent in a third. That’s as of the end of September, and things haven’t exactly improved since then. It’s possible that their bet may eventually pay off, but I’d be feeling pretty sick right now if I had a seat on that roller coaster.

Bryan Caisse, however, an 18-year veteran of the mortgage markets, thinks he can find some profit potential where so many have failed. He’s currently planning on launching Huxley Capital Management with backing from a United Arab Emirates investor. Supposedly, he claims that other hedge funds have been reckless in their use of leverage, and failed to properly handle liquidity challenges. As he put it, “Leverage is a very, very dangerous thing in any market; it can be deadly in a market where liquidity is uncertain.” No kidding?

To find these diamonds in the rough, Caisse says he’s looking for Fannie Mae and Freddie Mac mortgage bonds. These bonds are (surprise) trading at historically low levels even with U.S. Government backing. Through the use of “conservative leverage,” whatever that means, he sees some serious value opportunities, and hopefully profit down the line.

I’m sure I’m not the only one that’s skeptical here, but I can’t argue with the guy’s experience or success. Time will tell whether his into the line of fire strategy will work, but if other similar endeavors are any indication, the odds do not favor him.

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A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

Government assistance and intervention when it comes to housing and mortgages is always a thorny issue. First, it’s important to note that when the government does anything monetarily speaking, it’s paying for those activities with our tax dollars. As such, we tend to get sensitive when we think about where our tax dollars or going and whether we feel like that’s the correct allocation for money that could’ve gone to our pockets. In the case of housing and the government’s plans to rescue the housing market, we’re caught between our morals and our wallets. I don’t like watching people chain themselves to their house, either, but who’s fault is it really? Is it the government’s job to make sure you keep your home? There aren’t any easy answers here.

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