Fannie Mae's Earnings: Awful

Fannie Mae's stock is certain to tank today, and not necessarily for the obvious reason. Yes, its quarterly loss of $2.5 billion was much larger than expected. Yes, total shareholder equity evaporated at an even larger pace: It was was $38.8 billion as of March 31, down from $44.0 billion at the end 2007: a drop of a staggering $5.2 billion in one quarter. But much more immediately, Fannie Mae announced a $6 billion capital raise, including $4 billion of equity today alone.

A large chunk of that $4 billion is going to come from the issuance of something called "non-cumulative mandatory convertible preferred stock," which is a flavor of convertible bond. Now buyers of convertible bonds are a specialized stock, and they always short the stock when buying the bond, especially when they're buying a mandatory convert, which is essentially a form of equity issuance.

It's almost as if Fannie Mae was trying as hard as it could to push its stock price down today: not only releasing atrocious quarterly results, but at the same time also announcing a dilutive issuance of new equity and a simultaneous issuance of bonds whose buyers will be shorting the stock. Oh, and on top of all that, Fannie Mae announced that it will cut its dividend by 10 cents from the 35 cents paid this quarter.

Still, bad news for shareholders is probably good news for any taxpayers alarmed by Charles Duhigg's 2000-word article today on the precarious position that Fannie and Freddie find themselves in. As long as the capital markets are willing to inject new capital into the GSEs, that means the federal government doesn't have to.

Comments

[Egg]

You remember the "Greenspan put?"

Well, nowadays it's the "Bernanke call" that will keep pushing all financial stocks higher, no matter the news...hence FNM today. At least financials the Bernanke himself consider "in the club."

How long will it last? One month? One quarter? Rest of the year? Who knows...but it might have to be called the "Bernanke leap" eventually.

[drmalaka]

The article makes sense but the stock rallied today. Who knows.

What really makes even less sense to me though is why would anyone buy the stock today instead of yesterday? I can not imagine worse news than they reported, other than filing for bankruptch prior to the release. So if the worst possible news is a buy signal then nothing could make the stock go down. So I ask, why did these people buy today and not yesterday? What could they have possibly heard today that would have stopped them from buying?