Bombshell - "Fannie & Freddie should be directly incorporated into the federal budget". Financial Times has reported that in the wake of the "bail-out of Fannie Mae and Freddie Mac...the non-partisan Congressional Budget Office...said the housing giants' operations should sit on the government's books" and added "the companies should no longer be regarded as outside the public sector." The two mortgage companies have between them $5,400bn in liabilities, equal to the entire publicly traded debt of the US, alongside mortgage-related assets of about equal value. These will now all be accounted for by the CBO. The CBO bombshell came as it raised its baseline estimate for the US budget deficit to $407bn this year and a record $438bn next year owing to falling revenues and higher spending, some of it related to the fiscal stimulus." On news of the CBO findings "the price of credit default swaps on 5-year US government debt hit a record 18 bps in early trading, according to CMA Datavision. This means that it costs $18,000 a year to buy insurance on $10m of US government debt. However, the price of US government bonds rose and yields fell across the board, as concern over the economic outlook overwhelmed any rise in perceived credit risk."

Lehman Brother's woes continue. Bloomberg reports that "Lehman Brothers Holdings Inc., reporting the biggest loss in its 158-year history, said it will sell a majority stake in its asset-management unit, spin off commercial real-estate holdings and cut the dividend in an effort to shore up capital and regain investor confidence." This news comes on the heels of Tuesday's announcement that "talks with state-owned Korea Development Bank had ended, sending shares tumbling 45%...Lehman rose in New York trading Wednesday after posting a $3.9bn 3rd-quarter loss on $5.6bn of writedowns, worse than the $2.2bn loss analysts had predicted. The global credit-market meltdown has led to more than $500 bn of writedowns and credit losses since it began a year ago, sending financial shares around the world swooning. Lehman, the worst performer on the 11-company Amex Securities Broker/Dealer Index this year, has lost 88%. Lehman is "formally engaged with" with Blackrock Inc., the biggest publicly traded U.S. fund manager, to sell about $4 bn of the investment bank's U.K. residential mortgage holdings, according to today's statement. Lehman said the transaction would help reduce the firm's stake in home mortgages by 47% to $13.2 bn."

Fed "stopgap" loans may give Lehman breathing room. Bloomberg reports "access to Federal Reserve loans means Lehman, which has plunged this week on concern about its capital, may have breathing room that Bear Stearns Cos. lacked before its abrupt collapse. The program instituted in the aftermath of the Bear Stearns debacle, the Primary Dealer Credit Facility, could be used for funding while officials, regulators and executives find alternative sources of cash, Fed watchers said. "The PDCF could be used to keep Lehman operating until a broader solution was found," said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington. "The challenge is figuring out what the broader solution is." Lehman can borrow overnight from the central bank, with escalating costs if it keeps using the program. Because it's a stopgap, speculation may mount that the government will again intervene to prevent a large financial company from failing, after the Bear Stearns rescue and takeovers of Fannie and Freddie.

CMBS deals in the works? Morgan Stanley is expected to bring a $1bn CMBS deal to market in September. There are also reports that Citigroup is readying a CMBS deal that could be slated for sale by month's end. With the recent volatility in the credit markets, these deals represent critical opportunities to determine the market's appetite for newly issued mortgage-backed securities while establishing new benchmarks for CMBS pricing. Developing...

Dollar hits fresh one-year high. Financial Times reports "the dollar hit a one-year high on Tuesday as fears over the health of the global economy intensified... Analysts said the rise was not a reflection of strength in the US economy but rather an indication of weakness elsewhere. The dollar index, which tracks its progress against six leading currencies, rose to a high of 79.776, its strongest for 12 months. The dollar also rose to an 11-month high of $1.4049 against the euro and peaked at $1.7507 against the pound in early trade, just shy of its strongest level since April 2006. But the dollar gave back some of its gains as investors took profit later in the session and worries mounted over Lehman Brothers, the US investment bank. Late in New York, the dollar was up 0.1% to $1.4120 against the euro."

Colliers Meredith & Grew Perspective. Borrowers are becoming more sophisticated in the use of derivatives and other hedging techniques to exploit less expensive floating-rate financing options.