Fannie Mae - Or May Not

So let's say that I take a large position in the market and wind up with a harrowing loss that forces me to cut back my lifestyle. What would you think of my decision to borrow additional funds to add to that losing position?

Few rookie traders would engage in such dismal risk management. That, however, describes the situation of Fannie Mae (FNM), which yesterday reported large losses and a dividend cut, but rose nicely on news that their regulator is giving them greater rein to expand their mortgage portfolios.

If the housing market stabilizes, the decision to go "all in" will be hailed as a ballsy vote of confidence in the U.S. economy. (It also might set an interesting moral hazard precedent, when the next crises hit).

If, however, the housing market experiences a deeper drop than is currently projected, the liabilities incurred by FNM are truly mind-boggling. This is because billions of dollars of equity are supporting trillions of dollars of debt, as recently reported by the New York Times in an excellent article.

I'll be tracking price performance for FNM and money flows into the stock as a way of staying on top of this theme. I'm not a bear by temperament, but it makes me nervous to see our government engaging in actions that are characteristic of losing traders.

Comments

[User 68127:]

The government is speculating with taxpayer dollars. FNM is nothing more than a very risky call option at this point. If housing recovers, it could see huge gains. If not, shareholders could lose it all. Totally irresponsible on the part of government, but then, they are scared and trying to prop this thing up, in additional to all being on the FNM/FRE payroll...

2008 May 07 12:43 PM

[John Pseudonym:]

Complete house of cards. This all going to end very badly...

2008 May 07 02:20 PM

[Assetmgrsc:]

The writer of this article appears to be writing in a vacuum, as if FNM wasn't a creation of the government. They are obeying government wishes to help stabilize the housing market and they will not be allowed to fail.

2008 May 08 08:54 AM

[olretred:]

Our financial system will eventually hoist itself on its on petard.
Google "Plunge Protection Team".......

2008 May 08 09:12 AM

[Yoski:]

The "Plunge Protection Team" can only put lip stick on a pig for so long. Ben at the FED pawn shop is already taking in gun, tools and old jewlery as colleteral to make payday loans for broke bankers.
Eventually the government will be hit by too many players that are too big to fail. There won't be enough money to bailout all that needs bailing out. Investors around the world aren't likely to throw any more good money after bad (even so I underestimated the stupidity of foreigners before). At this point government will only have 2 equally bad choices left. Let'em eat cake or print more money. My guess is they'll print more money.

2008 May 09 06:40 AM