Frankly folks, after living through 2000-2002 and personally seeing how destructive it can be on one's capital I don't understand the gambling mentality, but that's just me. I expect Fannie and Freddie stock to trade frantically and in crazy nature with wild swings - I'll leave that to the people who do their best work at slot machines. But I did say Freddie was the easiest short I've seen in a long while, and in "theory" it should be down 80% immediately. (not sure if theory counts for anything anymore) If you have a long term (ahem) time horizon and can handle 80% dilution, hey they should be great buys on the open Monday ;)
The Wall Street Journal has their take...
- The government's plan to take over Fannie Mae and Freddie Mac may help the housing market and boost the value of the firm's bonds, but it's a body blow to stockholders that include some of the country's best known mutual funds and biggest banks.
- Under the plan, the government will own 80% of the two companies, leaving common stock holders with the remaining 20%, or one-fifth of what they owned on Friday.
- Owners of the companies' $36 billion in preferred shares also fare badly. They've already seen the value of these once-safe securities fall by half, and some argue they are worthless now that the dividends have been halted and because they will absorb any losses before the U.S. government is hit with them. (but remember, the government is working to make sure these people are taken care of.... behind the scenes)
- The ultimate value of both securities depends on how well Fannie and Freddie perform and how the government rescue effort plays out over the next several years.
- Fannie Mae closed Friday at $7.04 and Freddie at $5.10 and both fell sharply in after-hours trading as word that a takeover was imminent. They are expected to plummet when the market opens on Monday.
- "Based on this announcement, one can reasonably conclude that things must be materially worse at Fannie and Freddie than what the companies and the government had acknowledged only several weeks ago," said William Ackman, of Pershing Square Capital Management, who has been short Fannie and Freddie stock since early this year. (you can read Ackman's plan for a solution back in July here)
- When it comes to the holders of the bonds that Fannie and Freddie issued backed by home mortgages, the step makes those obligations "money good," says Pimco's Bill Gross. "The Treasury doesn't want to guarantee a trillion in assets ... but it's a big step. I think not only the Pimcos of the world, but also the sovereign wealth funds and central banks will gain confidence that there is absolutely no possibility of default." (what's a trillion among friends?)
- That means those bonds are likely to rally, narrowing the gap, or "spread," between yields on these securities and Treasury bonds. That, in turn, should help lower interest rates on new home loans, making them more affordable for borrowers. Andrew McCormick, head of securitized products at money manager T. Rowe Price, says Treasury's purchases coupled with agency buying of mortgage securities could help push spreads down by one percentage point. Over time, that could translate into a full percentage point drop in mortgage rates for home buyers. "This will put quite a jolt into the mortgage market," Mr. McCormick says, adding it is a step towards stabilizing the housing market. (that will be a good thing, all things being equal. However, with job losses accelerating and no end in sight yet for home price degradation it's not an end all, be all solution that will be shouted from the rooftops by the punditry starting @ Monday 6 AM)
- One big unknown is whether investors will grow more worried about the credit worthiness of the U.S. government given how much additional debt it has taken on. If that occurs, interest rates of Treasurys could rise, which could slow an economic recovery. (this one I am very interested in myself....)
- The carnage is widespread. The development is another blow to Legg Mason's Bill Miller, whose flagship Legg Mason Value Trust mutual fund is already down 31% this year. In early August Mr. Miller's group reported that it had raised its stake in Freddie Mac to 79 million shares from about 50 million earlier this year. (we cringed)
- That move made investors in Legg's portfolio the largest shareholders of the company. In a shareholder letter Mr. Miller dismissed the sell-off of Fannie and Freddie as part of a "frenzy" that took financials to the recent lows in mid-July. Mr. Miller didn't respond to a request for comment. (I'd think not - again folks, there is getting it wrong - we ALL do - and then there is doubling down on your wrong - which Investing 101 says not to do)
- Investment firm Dodge & Cox, for example, justified its investment by saying business was improving for Fannie and Freddie. The firm, which owns roughly 119 million shares of Fannie Mae bought the bulk of its stake in the company during the first quarter when the stock was trading between $18 and $40 per share.
- "We are currently studying the implications of the unprecedented action...and are reviewing our options" a Dodge spokesman said Sunday.
- Pzena Investment Management, which owned 21 million shares of Fannie Mae and at one point counted the stock as among its funds' biggest holdings, defended the two agencies in July in a public three-page letter titled "The Case for Fannie and Freddie" in which the company's managers wrote that both had sufficient reserves and capital and "significant revenue generation capability." They argued that "what's really needed is to resist the temptation to try and fix something that is not broken." The firm would not comment.
- It is unclear what will happen to Fannie and Freddie's publicly traded stock. Top officials of the New York Stock Exchange have been in discussions with government officials and other parties about the two companies' listing status, according to a person familiar with the matter.
- If the shares fall below $1, NYSE may be forced to impose a so-called operational trading halt, which means Fannie and Freddie shares would stop trading on the exchange floor and move to electronic platforms such as NYSE Arca. In the longer-run, the companies could be delisted from the Big Board if they no longer meet NYSE listing criteria.
[Jul 30: Federal Reserve Continues its Historic Actions]
[Jul 11: More Historic Actions (Potentially) by the Fed]
[May 4: Moral Hazard Run Amuck]
[Mar 22: A Historic 9 Days for the Federal Reserve]
[Mar 16: Fed Races to Rescue Bear Stearns]