Fannie, Freddie Bailout To Wipe Out Equity Holders?

Bloomberg is reporting Fannie, Freddie Fall as Barron's Says Bailout Likely.

Fannie Mae and Freddie Mac fell to almost 18-year lows in New York trading on concern the government will be forced to bail out the mortgage-finance companies, wiping out common stockholders.

Both Fannie and Freddie slid as much as 12 percent after Barron's said government officials anticipate the companies will fail to raise the equity capital they need, prompting the U.S. Treasury to step in. Fannie is down 82 percent this year. Freddie has fallen 85 percent.

"It is very, very likely to happen before the end of the third quarter," Ajay Rajadhyaksha, the head of fixed income strategy for Barclays Capital Inc., said in an interview. "Without government help, we think there is very little chance of Freddie completing a significant capital raising."

A rescue would include preferred stock with a seniority, dividend preference and convertibility right that would wipe out common stockholders, Barron's reported, citing an unidentified source in the Bush administration. Treasury Secretary Henry Paulson, who received the authority he requested from Congress to help the companies, has said a bailout won't be needed.
 

So much for the SEC's and the Treasury's effort to manipulate share prices higher so that Fannie and Freddie could raise capital without government assistance.

Fannie Mae Daily Chart

(Click on chart for sharper image.)

 

Fannie Mae (FNM) nearly tripled in 5 days but has now given every cent back. A new 52 week low was recorded today at $6.47. Freddie Mac (FRE) is back under $5. So much for blatant manipulation efforts.

Comments

[Still Renting:]

Holy cow! All these manipulation efforts are scarily reminiscent of the attempts that were made to prop up the markets, with only temporary and ultimately irrelevant results, back in 1929.

2008 Aug 18 01:06 PM

[bbzz24:]

hey,
keep stocks afloat to election time and then blame it all on obama.

2008 Aug 18 02:05 PM

[Malkiel:]

If I were a significant shareholder in either of these companies I would be preparing a fight to force the chair and boards of these companies to reject bailout--after all, why accept saving the company at the expense of one's own investment? Tell Paulson to screw himself and see who blinks first when you threaten to burn down the company rather than give it away...

2008 Aug 18 06:01 PM

[Google Fan:]

We all should have told Paulson to screw himself back in March when he said that they would not bail out anyone. In fact the entire leadership should be shown the door for attempting to regulate after the damage is done. They need to nationalize Fannie and Freddie and be done with it. This half ass approach to financial engineering is just prolonging a painful process caused by regulators asleep at the switch for years. The machine is broken, kill it and move on....

2008 Aug 18 06:32 PM

[Gary Lucido:]

If the government is going to provide capital that raises the value of the company then the government needs to make sure that they get 100% of that incremental value. If that ends up wiping out shareholders then so be it.

2008 Aug 18 06:36 PM

[Chris1:]

All the talk for GSE blood is self-interested or foolish. Why should the clowns in government who are at least if not more so guilty of fraud, failure and waste via policy mandates get to swipe the equity over a panic and circumstance they themselves have created?

Who is really the Enron in the story? GSE dupe shareholders or the government that talks confidence up and down the street with agendas? The shareholders deserved a hit but 100% while the government who drove the free lunch failure loans gets to point the finger and cut the shareholder down?

A new level of hypocrisy has been reached. Good luck privatizing the other 75 years of accumulated socialists failures through public offerings and "joint ventures".

2008 Aug 18 06:57 PM

[icandoitdon:]

i'm one of those who want GSE blood. for years, analysts and economists warned about the perils of having so much mortgage debt in the hands of these GSEs. not only were the many warnings ignored by their government sponsors, but FNM and FRE increased their exposure to high-risk mortgages in recent years to maintain market share. bankruptcy and nationalization is the only thing that will break the back of that flawed model. taxpayers will take a hit but eventually those organiations will be reconstituted without government sponsorship.

investors who bottom fished based on the premise that these companies were too important to fail or because of management's and government's assurances that they were "financially sound" were the victims of their own misjudgment.

2008 Aug 18 08:48 PM

[MattDC:]

C'mon, openly nationalising brings the outstanding obligations on book. What then happens when $5T is added to the national debt? [Sound of crickets...]. It's not like the ratings agencies can now stand by and do nothing; much burned, much incentive perhaps even to cut early, across ratings classes. So AAA comes off T-bonds and ... you tell me?

Anyhow, it's a mixed picture on Fannie/Freddie. Their stock may have come down 22% and 25% today (acc to Bloomberg), from current low base, but the volumes traded are tiny - less than a tenth of the July 10-13 panic period. I'm not saying there aren't problems or risks, or that low volumes are misrepresentative of price discovery, but barring a new and triggering announcement it looks like a steady worsening of the capital structure rather than a cataclysmic one. That may come, but not on current data, such as it is.

Malkiel and Google Fan, I'd be hiring lawyers, not issuing high ambition claims. But that's just me. I don't think decades of systematic disenfranchisement of minority shareholders is going to bear your suggestions fruit. Reminds me, there's got to be a market opportunity for the thousands of Wall Streeters fired and now advising litigants, no?

M

2008 Aug 18 10:34 PM

[Krakatoa:]

i don't agree... it won't totally wipe out the shareholders.... but 95% wipe out maybe :)

2008 Aug 19 06:21 AM

[madasiwannabe:]

Once again Mr. Shedlock, your articles speak volumes about your short position on these stocks. There's still a couple bucks left in the common, so keep pushing and I'm sure you'll make a ton at the nation's expense.

I've said it before and will say it again, nothing good will come out of wiping out the GSE's. There is enormous downward pressure coming from special interest groups like PIMCO that stand to make large sums of money at the demise of the GSE's and we the taxpayers will be picking up the tab.

Yesterday was a good indication of things to come and I'm not talking about the stock. The auction spread to attract buyers will continue to grow, not only for the GSE's but also banks and the Fed, which will drive interest rates higher and higher to make up the spread. That is what's called inflation!!!!

This in turn eats into buying power and will drive housing prices lower and accelerate the mortgage meltdown. Nationalizing a toxic portfolio will have serious consequences to the Fed's portfolio and cause increased spreads for US backed instruments, which will further erode liquidity. The loss of liquidity will in turn eat into the banks ability to recapitalize and cause the ultimate collapse of the entire U.S. Financial system. Those buying securities (like PIMCO) will get rich beyond imagination at the expense of the American people. I told you weeks ago this is what would happen and now, as the most casual observer can see, it has started.

I ask again, how could the GSE's get out of control with government oversite and regulations that keep them capped? Look at the facts. Their numbers were systematically dropped and their mortgage risk metrics were decreased shortly after Mr. Greenspan challenged the banks to make money available to every American. I'm sure if Fannie and Freddie were private companies, they would tell the world government regulators forced them to increase their portfolio's and take on more risk.

I say hammer down.... I've sold my stock and now I'm going short to help speed up the collapse. I'm also running my HELOC into the stops before it gets frozen so that I get to live it up before the big crash. I say let's wipe out our future over some sort of twisted, media inspired principle so we can get interest rates back to the 20% level of the 1980's as quickly as possible.

2008 Aug 19 08:01 AM

[BxCapricorn:]

I predict the government will take control on Sept. 6th, and the shorts will be correct.

2008 Sep 06 07:32 PM