Fannie and Freddie: Finally a Light at the End of the Tunnel?

Fannie Mae (FNM) and Freddie Mac (FRE) shares saw extreme volatility and heavy call volume Thursday. Shares of Freddie traded between $1.30 to $2.95 before settling the day down 3 cents to $1.86. In the options market, 115,000 calls and 21,000 puts traded on Freddie Thursday. Meanwhile, FNM traded between $1.09 and $2.76 before closing the day up 20 cents to $1.94. 131,000 FNM calls and 25,000 puts have traded on Fannie Mae.

At Thursday’s closing prices, FRE is up 238 percent on the week. FNM is up 181 percent. The heavy call volume and big gains come as a surprise because the two companies were seized by the government and placed into a conservatorship earlier this month.

There are a few possible explanations for the bullish trading in both Freddie and Fannie. First, buying is being fueled by heavy short covering in both names after the exercise of puts at expiration resulted in many failure to delivers and many buy ins. The problems arose during the September options expiration due to the Securities and Exchange Commission ban on short selling, announced Friday morning before the options expiration, which resulted in a lack of stock to sell short to handle the assignment at options expiration.

Hopes for more government intervention seem to be playing a role as well. Senator Barney Frank said Wednesday that a government bailout of the two banks could hurt smaller banks by devaluing preferred FNM and FRE, perhaps raising hopes the government will take steps to protect their shareholders. Fannie Mae shares also rose Wednesday afternoon after it said it did not request money from the Treasury's borrowing facility.

Thursday, shares seemed to get a lift after Dow Jones Newswires reported that that the two GSEs might be included in the government’s toxic debt removal program. Finally, some investors seem to be betting that the two companies could eventually move out of conservatorship and, if so, common shareholder rights will be fully restored sooner than expected if the early results from the bailout plan prove to be working as policymakers hope.

Disclosure: None

Comments

[Ishortyou:]

looks like politicians are a little upset about the option calls or puts thing aiming for bans on options calls or puts on federal property.

2008 Sep 26 05:51 AM

[richard_nog...:]

I'm speculating that the stock will rise to about $3.00.

2008 Sep 26 09:35 AM

[horned toad...:]

One fact the author did not factor in was the fact the regulator for FNM and FRE has removed the minimum capital reserve requirement, thus greatly reducing the possibility of dilution from the senior preferred share agreement that both institutions entered into with the government.

2008 Sep 26 09:56 AM

[fa28:]

that light is a frieght train comming at you

2008 Sep 26 10:49 AM

[fa28:]

That light is a frieght train coming at you.

2008 Sep 26 10:50 AM

[attila:]

The upside movement of FRE and FNM during the worst price decline
of realestate property indicates the irrational and irresponsible
investments of the ones controling huge capital. The little guy is the
one who will take the burden again. Positive EPS is reqiured to get
the sophisticeated investors into the US market.
Bailout can not cure the illness of Wal Street, it is only a temporary
relief. We may want to beleive that the value of the US properties
will rebound like after the Great Depression. However, circumstances
had been changed. The European Union, Asia and India became
better hosts for growth and the Euro may slowly take over the US dollar especially with the corrupt political and corporate tactics.
T

2008 Sep 26 12:53 PM

[attila:]

The upside movement of FRE and FNM during the worst price decline
of realestate property indicates the irrational and irresponsible
investments of the ones controling huge capital. The little guy is the
one who will take the burden again. Positive EPS is reqiured to get
the sophisticeated investors into the US market.
Bailout can not cure the illness of Wal Street, it is only a temporary
relief. We may want to beleive that the value of the US properties
will rebound like after the Great Depression. However, circumstances
had been changed. The European Union, Asia and India became
better hosts for growth and the Euro may slowly take over the US dollar especially with the corrupt political and corporate tactics.
T

2008 Sep 26 12:53 PM

[gatewayast:]

It is becoming clearer each day that pushing the preferred shareholders of both FNM & FRE (most of whom were banks not individual shareholders, except our clients) in front of the train had some unanticipated consequences including making the dire capital situation for quite a number of banks even worse and also making it virtually impossible for them to go back to the preferred stock capital markets well leaving many of them going down the stream rapidly without a paddle or even a life vest. Not a pretty picture!. Hence there may be some rethinking of the preferred issue, especially after the election.

2008 Sep 26 01:51 PM

[bordens47:]

So is FRE and FNM a good buy right now? Because if I put 5k into each I could really make good profit if they both return to 20 or more per share? Anyone have a good answer to this?

2008 Sep 26 04:12 PM

[User 271002:]

This is a layup. I bought at 60 cents and still own. Let me ask you a question. If you owned a company that went bellyup and some one gave you access to 100 billion dollars, helped/forced you to restructure..don't you think you might have a good chance of being successful.?? Also Frddie Mac is at the heart of the economic problem.... An absolute layup....common stock should be at least 5 in the short term after that performance will dictate!!

My last trade was priceline in 2001? I bought it for $1.40/share....

2008 Sep 26 07:55 PM

[forwoodenboats:]

I'm a little confused here, maybe someone could help me out.
Why are Freddie and Fannie still trading? Doesn't the government own it now? Same with WAMU - it was trading today after the government confiscated it and sold it to someone else. Obviously they'd been thinking about it, yet there was no warning - at 3:47 I bought 5k shares @ 1.69, sold them 12 minutes later for 1.77...but only because my buy orders for 20K @ 1.55 didn't go through and I needed to go grocery shopping - and there was an angel on my shoulder, PTL.
I come back from shopping and O M G.....they were close to 5 bucks about a week ago.
Are they going to trade tomorow? Why, or why not?

2008 Sep 26 08:54 PM

[najdorf:]

The government did not entirely take over FNM and FRE. They are in conservatorship and the government controls a large stake in the companies (i.e. the existing common shareholders got massively diluted).

2008 Sep 27 03:28 PM

[PeteK:]

Mr. Ruffy, Barney Frank is not a Senator yet. He's the famous congressman right now. FRE, FNM, AIG, are these
all in the same boat right now ? who has a better chance
of getting back to its normal self ? Thanks.

2008 Sep 27 06:03 PM

[madasiwannabe:]

The run up started due to short covering and continued to rally when day traders jumped in for the ride. When reality set in Thursday, the stock started drifting back and my guess is it will continue.

The takeover of the GSE's will go down as the biggest mistake in the Treasuries history. Not only is it costing the taxpayers, but it cost the shareholders 36 Billion in value, wiped out corporate and mutual fund investors, and destroyed the worlds confidence in the US banking system.

The government stake in the GSE's is pure profit for the taxpayers at the shareholders expense. This is what we call "socializing profits and privitizing losses". Kind of like what Joseph Stalin did, but this time there was no blood shed, only dollars. The whole mess is shameful

2008 Sep 27 06:52 PM

[WEBISKING:]

Time will prove thatThis deal will be profitable the SMARTEST FINANCE GUY Buffett said it will MAKE the TAXPAYERS MONEY, Those who bought Ko at 49.99 MO at 19.72 and Pm at 49.50 this week will EASILY make double digit annual returns DESPITE all this doom and gloom .Be greedy when others are fearful and BUY QUALITY at discount prices

2008 Sep 28 09:10 AM

[Absolved:]

It's a freight train...

2008 Sep 28 10:31 PM

[User 272981:]

What's the deal about "conservatorship" with FRE and FNM? Could someone please explain? Thanks in advance.

2008 Sep 30 07:48 PM

[Axetogrind:]

I would like to read if there is an upside that can come of FRE and FNM in the near future?

2008 Oct 03 08:14 PM

[JT Herch:]

I bought FNM at $1.84 per share. Could this company go bankrupt and cause me to lose all of my investment? Or, is it more likely that the stock will eventually go higher than my entry price? Help....I'm sinking (hehe).

2008 Oct 05 02:45 AM