Friday, July 11, 2008

More on Fannie and Freddie

Here is a nice summary someone sent me on FRE/FNM:

FNM and FRE are taking center stage again today, with both stocks down sharply (FRE dropped as much as 54% and FNM dropped as much as 49%) at the lowest levels since the early 90's after a damaging week (FNM -47% on the week, FRE -60% on the week).

The market has been intensely focused on FNM and FRE this week, with the financials and broader market largely taking their cues from the stock movement of the GSEs. The problems for the GSEs began on Monday with capital concerns related to a potential FASB rule change. The GSEs' regulator, OFHEO, then came out and said the accounting rule change likely won't require cap increases at FNM & FRE, and that the two are adequately capitalized.

Then on Wed, the two stocks weakened after Fannie Mae paid record spreads on a two-year note sale. Then yesterday the stocks got hit after former Federal Reserve President Poole said FNM and FRE could be 'insolvent' after losses and the WSJ reported the Bush administration has held talks about what to do in the event FNM and FRE falter.

Concerns reached a new high today as reports out this morning said senior Bush administration officials are considering a plan to have the govt take over one or both of Fannie Mae (FNM) and Freddie Mac (FRE) and place them in a conservatorship -- a situation that would leave the equities of FNM and FRE "worth little or nothing". Paulson came out with a statement saying the focus is on backing FNM, FRE in their current form, suggesting any sort of bailout is not imminent.

A number of analysts have weighed in this morning as well, most notably Citigroup, who said they believe the recent sell-offs FRE and FNM is overdone. The firm spoke with FRE mgmt this morning and they indicated that there has been no significant change in their financial condition during 2Q beyond prior guidance. The firm believes that no one in Washington desires for a nationalization of the GSEs, which would bring the burden of providing mortgage access and liquidity on to the shoulders of taxpayers. Piper noted there has not been one significant piece of macroeconomic or co specific news on either co to drive the decline.

2 Comments:

At 9:37 AM, Blogger Tim said...

Just wanted to get an update on how oversold the market is now. Of course the market will rally at some point--there are always violent bear market rallies, but they come when almost everyone, including guys like you, turn bearish. FNM/FRE aren't the real story here today. Lehman is the one that you should be watching. Either FNM/FRE get nationalized this weekend or 2 months from now. Their fate is sealed. The real issue is what happens to Lehman which is down another 20% today. The answer there isn't quite as easy to figure out.

 
At 7:49 PM, Blogger OT said...

One month prior to the fall of BSC, they also had no `liquidity issues'.

I think smart money knows enough, that is why there has not been a meaningful rally. We've been oversold for a couple weeks now.

I also wonder if there will be more speculation after the Indymac seizure by the FDIC regulators after the close today.

 

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