“Freddie Mac’s the Cheapest Stock I’ve Ever Seen”

I agree that Financial stocks, especially the big money center banks (Citi, BAC, USB, WFC, Wachovia) and the GSEs (Freddie and Fannie) are very cheap on every metric. However, there is a good reason they are cheap, no one knows how much they will eventually have to write down, not even the leaders of those institutions.

The problem with this entire sub-prime mortgage induced meltdown is that every time a bank marks its mortgage securities down to market, the market, which is very illiquid right now, goes down further requiring another round of markdowns of assets.

As this process continues, eventually the bank’s capital structure is threatened as their liabilities come close to exceeding their assets. The bank at this stage can violate its capital reserve requirements that are set by law and it is then required to raise money selling shares (such as Citi just did to Abu Dhabi), or can sell off business units.

So, yes, there is value in financials, and it may be a good time to buy up the best of the breed, but there may be more pain to come until the market for commercial paper (debt) returns.