In the Eye of the Storm: Fannie Mae, Freddie Mac and Lehman Brothers

Last week's trading was dominated by concerns that the U.S. Government would essentially nationalize Fannie Mae (FNM) and Freddie Mac (FRE) and their common stockholders wiped out.  The catalyst was a story that appeared in Barron’s over the previous weekend “The Endgame Nears For Fannie and Freddie” (subscription required) which wrote:

Should the agencies fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises, according to our source. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie’s and Freddie’s existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends. Then again, the administration might show minimal kindness to preferred shareholders; local and regional bankers have been lobbying the Bushies not to wipe out the preferred since the bankers own a lot of that paper and rely on the bank preferred-stock market for much of their own equity capital [bold and italics added].

At the end of the week, focus also shifted onto Lehman Brothers (LEH) as investors considered its viability as an independent entity.  On Thursday, well known financials analyst Dick Bove speculated that Lehman might be acquired (“Lehman Could See Hostile Takeover” (subscription required), Barron’s, Hot Research, Thursday August 21):

The stage is set for a hostile bid to take over the whole company......

 Will it happen?  I do not know.  Should it happen?  Absolutely, opportunities like this are rarely evident in the markets.

On Friday morning, state run Korean Development Bank expressed potential interest in acquiring Lehman, causing Lehman’s shares to surge more than 10% today.

The common denominator between both these companies, of course, is their heavy exposure to mortgage backed securities:

Lehman’s business is broader than Fannie and Freddie, but the link is that they were doing the same thing - packaging mortgages and selling them - Dick Bove, quoted in the New York Times.

Something is going to happen on both these fronts - the GSEs and Lehman.  I don’t know what it is but it will be interesting and important for financial markets.

Disclosure: Top Gun has no position in Fannie Mae, Freddie Mac or Lehman Brothers shares.

Comments

[Philly Jim:]

America for Sale.

The legacy of G.W.Bush's administration of the nation.

Why not just let Saudi Arabia, Dubai and China buy all of America's greatest assets? So long as friends of W have made their billions off the Iraq war, that's all that matters right? Got that cowboy accent foolin em all, yeehaw.

2008 Aug 24 03:00 AM

[madasiwannabe:]

Dick Bove is completely wrong. Why would anyone want to buy LEH now? If they wait till it hits bottom, they could get a Government backed deal like JPM did. The apparent desperate activity behind the scenes at LEH (which is getting more frantic as Q3 wraps up) is the main reason their stock is sliding. Fulm needs to check his ego and do what needs to be done before the whole company collapses.

2008 Aug 24 07:13 AM