najdorf

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

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).

What Will Fannie / Freddie Mean for Monday?

daytrading: Bondholders are not equityholders. They are debtholders. If FNM/FRE did not make good on their debt it would be a default and lead to bankruptcy. Then you'd have problems with CDSs, other countries' relations with the US, bank solvency, massive damage to bond funds, etc. Anybody still holding the common today is a speculator and deserves what they get. The same is not true of debtholders - FNM and FRE debt has been second only to Treasury debt for a long time and it's a much more significant issue than the price of the stock.

While we're at it, in order to understand the impact on banks we have to look at:

a. how much preferred and common stock they hold (though any bank still holding FNM or FRE common should also be taken over by the government, as they have failed risk management) - this will be way down tomorrow.
b. how much FNM and FRE debt they hold - this will be way up tomorrow and is a significantly larger pot than the above pot.
c. how this affects bank's access to capital and ability to securitize mortages (complicated, may take some time to figure out).

Fannie, Freddie Headed for Conservatorship

palsboss: What on earth are you talking about? 2006 wasn't a high for many stocks, but even still, who is close to their high 2006 share price? Not BAC, WFC, C, WB, or any other major retail bank. Not LEH, MER, or any other major investment bank (GS is close, but they're down significantly from 2007 levels). FNM, FRE: still way down of course. AIG: hurting. Believe me, no one is ignoring the fact that the financial sector is in a hole. The rallies of the last few months have been anticipations of recovery a year or two down the line. If you're looking for maximum profits, you can't wait until everything looks sunny to buy.

Anyone investing and following the news has been anticipating a FNM/FRE bailout for a while now. The possible negative effects and the other problems in financial companies were already reflected in the low prices. Financials rose on the news because the markets prefer certainty and the bailout sounds like a relatively measured and well-planned effort rather than a midday "Oh noes!!! FNM and FRE are worth nothing!!!" announcement. Even still financial prices are very low, and more institutions will fail. Investors are buying because companies that don't fail will be worth significantly more in the future.

Financials: Don't Believe the Rumors

Lavalyn and jpd are right. You seem to have a big problem with only reading the assets portion of balance sheets. You should check out the liabilities some time - there's some interesting stuff in there. If I've borrowed 500,000 to buy a 500,000 house, and now the house is worth 400,000, and at the same time my income is impaired, I'm not really worth 500,000. I'm worth negative something, and I might just walk away. At that point, investing in me will have proven to be a bad idea. Banks are in a larger version of the same situation. They're bigger than me and they may not actually be negative YET, but a lot are very close and continuing to slide that way.