Why I Finally Bought Fannie Mae

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Includes: FMCC, FNMA
by: Stan Muse

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.