Why I Finally Bought Fannie Mae 22 comments
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I finally bought Fannie Mae (FNM) yesterday at $4.77 after it had fallen another 20% on the day.
Even though it fell another 10% before finally closing at $4.40, I believe it will be a great trade in the end.
My reasoning is that there is no way that the government can allow Fannie and Freddie (FRE) to fail, or let the common shareholders be wiped out. To do so would signal the total failure of capitalism, and the collapse of the US economy, not unlike the collapse of the Soviet Union.
These are not just a couple of publicly traded banks that got in trouble. They are at the very heart of our economy.
It is common knowledge that these two institutions are in a lot of financial trouble and that they may even be insolvent at this point. But we have to look at how they got there, and who should bear the responsibility for reviving them. Their primary mission has been to carry out a government mandate to provide backing for mortgages in order to raise the standard of living for all Americans. They have carried out that mission with the backing of the stockholders since 1938. There is no doubt that all Americans have benefited, even those who have never had a mortgage. It is therefore the responsibility of the US government to right this ship.
I have always had conventional fixed loans and have never been late on a payment. I have been working and paying taxes since I was 12 years old and I am as mad as anyone about how we got into this mortgage mess and about what must happen next. This is going to cost taxpayers dearly now and in the future. But, to do nothing, as many hard line capitalists advocate, would cost us all much more. The ripple effects of letting Fannie and Freddie fail would be catastrophic both here and abroad since many foreign entities are also involved.
As Jim Cramer suggested yesterday, the SEC should immediately stop naked short selling and stop trading of these securities until a viable plan for recovery can be worked out. My suggestion is an open-ended interest-free loan to be paid back to the US Treasury. The pay back period and terms could be reviewed and revised each month until the loan is retired. Congress should also act immediately to allow mortgage holders to pay off their mortgages with their IRA funds, without penalty or taxes, in order to inject liquidity into the system. Everyone would benefit form this and it would be a huge boost to the economy.
From StreetInsider.Com:
Fannie Mae's (NYSE: FNM) CEO and President, Daniel Mudd, told National Public Radio, that the U.S. Treasury has not offered any help and Fannie has not asked for any and that the company has more capital than it ever has in its history. He also said that the private mortgage market is "gone" and business is robust.
It doesn’t seem that anyone is buying this. Either everyone else is wrong or Mudd’s name is going to be Mudd. If Mudd is correct, then these are raging buys indeed.
In summary, I believe that what we are seeing is not unlike when Bear Sterns was trading at around trading at $3.00. There will be a rescue plan forthcoming in the next few days and the two stocks will trade much above their current beaten down levels.
Disclosure: Stan Muse is LONG on FNM.
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This article has 22 comments:
These "leaders" in charge of the Fed have been feeding us pablum for years, from war, to removing gold and silver from being money, but some of us passed eigth grade math and know differently when we look at the quality of the doc behind the paper. It was always second tier, by design. No doc, is a joke, not an investment.
Under the radar, two years ago, I Oct '08 law strengthening the documentation requirements even for subprime, might have made a difference. Sorry. It is too late for anyone but daytraders this stock. The common we bought is toast, the world cringing as they decry, as oversea did this morning, that they, overseas, have FNM/FRE bonds, and the Fed govt will buy preferred, as stopgap, diluting the entire company, pressuring common further, getting priority for payout, when and if dissolution occurs. Political gaffe, from bailing out the common, prevents us from any rescue. We, the common, is toast.
Fuhgeddaboudit.
Time to do a Billy Crystal "do over", repackage the liar and subprime loans into something somebody will buy overseas (good luck), keep the doc paper and the new loans coming into a new entity with strict guidelines.
That honors bond holders and preferred the old FRE/FNM, that trashes the common you and I hold unfortunately, but it starts the world repairing itself.
I tried to call my Congressman on this issue this week.
They were on vacation. The Housing Chief came back off vacation to talk the matter over with Paulson et al yesterday.
I think he came back to pick up a pair of socks he forgot.
Call do over, and let's straighten this thing out without leaving it lingering over the American people and the world another YEAR!
companies were bankrupt-while the companies been declaring some impressive earnings complying with GAAP standards.Now we have some speculative crystal ball predictions , assumptions and conclusions which if fullfilled would create a Goby dessert of global economies.
In the meantime ,both agencies are performing key functions they were designed to do.U.S economy is consolidating for the rebound in the period ahead..The SEC and the Congress should look into speculative distortions which could undermine the "fabric"of global economies.The Sorbane Oxley (SOX) act was created to protect investors from dishonest corporate executives(via stiff penalties).
Parallel legislation should be passed aimed th the rumormongers whose actions can dislocate economy for the sake of defending short positions.
In the meantime both agencies appear to be financially sound and their reserves are more than sufficient to cover any realistic exposure.
Let's see if there are any more fairy tales left.
I was of the same mind as you and I bought FNM. In a matter of weeks I lost 37% of my money. That was more pain than I could stand. I got out while I still had something to get out. If I had held on, I would have lost an additional 30%. At the end of the day, it doesn't make any difference what we think. Stock is only worth what someone else is willing to pay for it. The market obviously sees a lot more risk than potential reward and has pulled all support. Hope your investment is a small holding.
Investing 101 - common stock is an option on the profits for the next 50 years, secondary to bond holders and preferred stock holders. And in this case, the US Treasury, Russia, China and Japan.
no value after bailout
like enron global crossing and worldcom
dont get caught here and lose it all
value is zero
they will let you holding the bag with zero
butt yu will have a hell of a tax write off
be wise dump em fast as you can
www.youtube.com/watch?...
So far as I know, both were U.S. Government entities until
the Johnson administration. LBJ had them sold off to private
investors as a way to remove their inherent liabilities from the
Federal Government's balance sheet and offset the massive
liabilities caused by the Vietnam War costs.
balance sheet
Great way to invest, praying for a bankrupt government to bail you out.
----------------------...
So true -- we are already 50+ trillion dollars in debt -- what is another trillion here or there: one T for financials, one T for the war, etc...
Then we will inflate the heck out of our currency to paid off those foreigners who is holding our debt. That is exactly where we are heading. If Zimbawie can have an inflation of 1 million times, we can too.
I just don't understand the mentality of those idiots who are screaming that we should bail these thieves out. They are stealing my tax dollars with the help from the FED -- it's just sux.
Please explain to me how baling out FRE stockholders helps to defeat the "failure of capitalism".
No long-term investor in their right mind has ridden this stock down this 95% decline. The only "stockholders" in FRE are speculators like you who have no interest in the business of the company but are looking to make a quick buck on the assumption the governmnent will buy them out.
There's no "failure of capitalism" here. Just "failure to reward mindless risk-taking".
"Federal National Mortgage Association (Fannie Mae) is engaged in providing funds to mortgage lenders through its purchases of mortgage assets, and issuing and guaranteeing mortgage-related securities that facilitate the flow of additional funds into the mortgage market. The Company also makes other investments that increase the supply of affordable housing. It is a government-sponsored enterprise (GSE) chartered by the United States Congress and is aligned with national policies to support expanded access to housing and increased opportunities for homeownership. The Company is organized in three business segments: Single-Family Credit Guaranty, Housing and Community Development, and Capital Markets."
**********************
Many investors are switching their thoughts as to how the GSEs will be "backstopped." Rather than wiping out hundreds of pension funds along with their many retirees, the Treasury should utilize the recently congress-approved "unlimited loan funding" measure. This will allow the GSEs to function in a normal manner until the housing crisis passes, the GSEs recover and to pay back the loans with interest, thereby NOT risking taxpayer monies, except in a last ditch solution. This will allow the GSEs to remain in their currently existing structure as desired by the government entities, i.e., as shareholder owned entities ... the capitalist way.
The stock price is rising today due to the realization that this is going to be a long, drawn out process, but the companies will survive perhaps forever, but, if not, the stock is a good trade for a long, long time.
This solution also allows the federal government to avoid the blackest black eye over their apparent negligence of a problem that was seen building for many, many years and for which they were repeatedly warned. Also, they allowed the implicit, almost explicit investment assurances to thrive. For that reason, and to avoid a complete lack of faith and a growing distrust in government by its citizens, the Treasury will not take any action that will lead to worthless stock.
FNM and FRE have both declined to ask for help and the Treasury has not offered help. The reason is clear: when the GSEs really need funds in order to roll over their debt and continue to survive, the loans will be made available. In the meantime, they will have the opportunity to work their way out of the mess they are in ... at least, reduce their need for outside assistance over time. Ultimately, the GSEs' monopolistic power will be reduced and greater privatization will take place.
Many see this situation as a great investment opportunity.
There will be a receiver weekend in mid-Sept. A pair of new federal agencies will be created-- effectively, the Mortgage Bureau of the Treasury Dept. If no one is tipped off Friday afternoon, FRE and FNM will appear Monday morning, after a huge pre-market plunge to penny level, as tickers for defunct firms holding only bad debt. Some short covering rallies follow before they settle down to the sub-$0.25 range.
Position: Short FRE and FNM.
Politics aside, and inspite of what Alan Greenspan and Warren Buffett have said, the initial FED's fannie and freddie bailout plan is indeed to essentially safeguard taxpayers and private equity(gamblers and greedy individuals) rather then genuine long term investors. Those who say it is sell out do not understand the real maths. Taxpayers stand to loose much much more if Freddie and Fannie are nationalize and not to mention the cascading fallout to mortgage/insurance markets and the trust people have in the administration to honor its GSE institutions. The markets(genuine investors) know this and therefore want more assurances from the govt that they will let the markets find the equilibrium rather then nationalize and leave investors with nothing. If the markets do not participant, the taxpayers stand to loose big time as GSE loans are clearly sovereign loans. The govt will have to come out with much more and with no assurance of getting back anything in return.
The other alternative of selling out to private equity with zero value to current investors will also be a fatal error. They will strip the companies take their profits and sell it. The markets and global investers will also loose faith in all the assurances the govt and Freddie and Fannie have given to invest more in these companies just a few weeks ago. The
trust once lost will take a long time to gain back. There is also no gaurantee that private equities have national or broader social concerns. Their priority is going to be their own stockholders, who essentially are again the markets.
The market is looking for firm and decisive actions to show that the govt is prepared to invest in Freddie and Fannie in the short term to shore confidence against the poor negative sentiments. Freddie and Fannie are not yet bankrupt and their business models are still relevant albeit in certain rough patches. with some short term help They have enough cash returns and expenses to roll over and navigate from the current crisis.
Time is of essence. The FED need to act fast and decisively.
I'm a real newbie in stock investment.
I recently purchased small shares of Fannie Mae for $1.18 about 4 days ago. When I got the settlement, it said Non-negotiable. Does this mean that I cannot trade these stocks anymore in the market? Or is this non-negotiable status to be lifted off in the future once the Fed decides what to do for Fannie Mae and once Fannie Mae gets back its status as GSE? Can somebody let me know?