If you're bullish...(or what subprime problem?)

Two recent transactions have put a hole in the bear's argument that the subprime mortgage problems will weigh down the economy and stock market. 

First, Fremont General (FMT), one of the major sub-prime mortgage lenders, announced that it has sold its commercial real-estate lending business to iStar Financial (SFI), a fairly sophisticated financial company.  In addition, the company has brought in banking industry veteran Gerald Ford to clean up Fremont. 

Second, Fifth Third Bank (FITB) recently bought the troubled Florida banking arm from R&G Financial.  These two deals indicate that there are willing buyers of troubled assets. 

Jim Cramer had an insightful article about how Fremont General's deal is a significant blow to the bears, especially given the high short position in the stock.  However, I think the implications of this deal extend beyond just hurting the short sellers in FMT.  One of the most credible bear arguments in this bullish market has been the subprime implosion and the potential for it to spread to the rest of the housing sector and the broader economy.  However, with this deal, it seems that there are more than enough buyers of distressed assets to sweep up the mess.  Like the thrift implosion in the early 1990s, in which investors came in to buy assets and loans on the cheap, it seems this real estate problem will also be fixed by the private market.  The liquidity that is putting a floor under stocks is now also putting a floor underneath the real estate problems. 

The Fifth Third deal shows that sophisticated buyers are not afraid to take on the toxic real estate market that is Florida.  Florida experienced a classic real estate bubble driven by over speculation and cheap money.  The fact that FITB still wants to be in the market and isn't pulling in its horns indicates that most troubled financial institutions in Florida can probably find a white knight to save them rather than sinking into the Florida swamp.  This is important because serious economic problems usually occur when banks have to reign in lending, bringing capital investment and spending to a halt.  If the Florida banks can stay liquid, the rest of Florida's economy, aside from construction, should hold up fine. 

The two deals confirm what the bulls have been saying - the subprime and real estate problems will be contained and won't drag down the rest of the economy.  The liquidity tide continues to roll right over the bear's best arguments for a major market decline. 

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