Should I Buy Fannie or Freddie Stock Today?

Should I buy or sell Fannie or Freddie stock today? It is an interesting puzzle. On the positive side, the US government is now backing the debt of these companies. On the negative side, Paulson's track record with Bear Sterns shareholders will give a pause to punters in Fannie and Freddie.

This is what Paulson is saying in his news release:

"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction."

So far in the news release, it seems shareholder survival of the troubled entity is crucial - this is not Bear Sterns. And later:

"Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed."

The Treasury is not buying equity today. They want the stock to go higher and see if these two can raise money through public markets. If the two stocks recover to $25 levels, there might be one new round of equity raise possible through public markets.

Are there brave people out there willing to put more equity into these black boxes at $25? My guess is there are - at least for one more round. After that, if there is further need, US govt will be forced to step in and nationalize.

The point is - if Paulson wants to prevent shareholders from enjoying the benefits of his largesse, he needs to nationalize Fannie and Freddie today. If he is too worried about moral hazard, he should clearly state that Treasury will invest in these companies but at $1/share. From the opening of his press release, it appears he wants these two to remain public entities owned by shareholders.

I think this is like Lehman on March 18. I dont know about the long-term future of these companies. But the chances they double or triple in next 24 hours is high. There is a huge short interest in them, and short covering itself will propel them higher.

It is a very confusing situation. If Paulson wants to avoid moral hazard, he has to extinguish current shareholders. He has done that once to Bear Sterns shareholders. Will he do the same with Fannie and Freddie shareholders? If these stocks stay where they are, there is no way these companies can raise the requisite equity. So the Treasury will step in, which will involve wiping out existing shareholders.

Now, logic might not work and Paulson might change tracks. But I will go with logic.

The survival of existing shareholders is contingent on the stock going up. The stock price is driving the fundamentals. Interesting stuff. I don't think I will, can or should punt.

Comments

[bbzz24:]

buy as much as you could afford with leverage!

2008 Jul 14 11:05 AM

[bearfund:]

No way. The market cap of these companies is quite small and owned almost exclusively by Americans (mainly mutual funds). It's not like the debt where you have Russia armed to the teeth with nukes and holding $100b of the stuff. That I would buy, if I wanted a yield below inflation. The stock... no thanks. It's a short to zero candidate if anything.

2008 Jul 14 11:17 AM

[Jason Rines...:]

If you were part of Lehman's upper-management team, you had the inside information you needed to know exactly when to dump. So if your comparing the two scenerios, perhaps my statement tells you something.

2008 Jul 14 12:47 PM

[morgan77:]

I agree bearfund-

These both look a lot better to short than buy. Sure they may go up through the week but it will be superficial in the end.

2008 Jul 14 12:56 PM

[Chris White:]

Depends whose money it is!

2008 Jul 14 01:26 PM

[logicalsinger:]

wait, is this a trick question? It is, isn't it?

2008 Jul 14 01:42 PM

[Dan Tully's...:]

Freddie and Fannie are toast, but I think it may be time to start picking through the rubble.

2008 Jul 14 02:10 PM

[Just Some Guy:]

A bit of overstatement, F&F have been semi-nationalized from the start, and if they now need to be semi-hemi-demi-nationa... (and I guess they do), it won't be such a huge change.

However, I agree that the problem is in setting a share price. $1 seems too low. Note, that the firms could recover and the government sell back the shares for a profit!

Meanwhile, I wonder about a clawback on executive compensation for these two companies over the past, oh, five or ten years.

2008 Jul 14 02:27 PM

[icandoitdon:]

for all of those sophistiated investors who think humpty dumpty...er...freedie fannie...will be put back together again you're simply wrong. today's trading in these stocks suggest as much. the short lived rally was nothing more than short covering.

these stocks are poison and nothing the government did changes that. they kicked the can down the road hoping for the miracle that willl never come, i.e. a high enough stock price to instill the confidence necessary to float the equity they desperately need.

their razor thin capital base worked fine as long as housing prices were rising but those days are history. it is insuffient to support their relentlessly increasing losses as a result of the relentlessly softening housing market. barron's view notwithstanding, that is not a trend that will be quickly reversed. it could easily get worse as the credit system freezes up...which it could. that's what the stock prices of some of these banks are suggesting. if this happens, fannie and freddie will go down faster than the titanic.

look for these companies to be nationalized sooner rather than later and that means shareholders will get wiped out. don't even think about buying them.

2008 Jul 14 05:21 PM

[vv234:]

hello,

what would happen to my stocks if the government is going to bail them out? thanks!

2008 Aug 18 06:03 PM

[svr:]

If this is gov. backed at $1 per share....hold on to it and ride it. How can it fail? The gov't will come through as it always does. What if they get it corrected over the next ten years and then sell it back to a profit?

2008 Oct 13 09:48 PM

[richard_nog...:]

I bought 1500 shares at $1.02. They way I see it, this stock has already been thrashed, and the treasury pointedly stated that they would not stop people from trading common stock. Both political parties do not want to see Fannie be nationalized, so to me it's as good as gold. I don't foresee it reaching $60/share, but it will reach $10/share...eventually...

Click here to see what mutual funds are doing with it, since they own 95% of common shares. See thebuylist.com/default...

The shortsellers are leaving it alone, because there isn't anything left to short. See www.shortsqueeze.com/?...

The stock isn't being shorted

2008 Oct 15 06:30 PM

[hasiem:]

I bought 20000 shares at 0.81, these shares are like money in the bank, in 5 years they will be up to 15.00 easy

Apr 21 12:44 PM