Fannie, Freddie, Heading to Zero

What did it mean to investors when Freddie & Fannie shares jumped (27% and 21%) and their trading volume for both was the highest since late October?

Not much. The most recent political news is that the White House has granted the former GSEs a blank check — no cap on aid. (Hence, why they are now former GSEs). That was the cause of their share price rally. But what does this mean for the companie’s future?

Nothing good. It signals that Uncle Sam will likely use the firms — the government owns 80% of both — to intervene further in the housing market.

Here’s Tom Petruno with the details:

“But whatever additional federal money flows into Fannie and Freddie would almost certainly come at the expense of shareholders’ remaining stake. The government now owns 80% of both firms.

The administration is supposed to announce its long-term strategy for Fannie and Freddie in February. The companies’ losses could continue to balloon if, as some analysts suspect, the White House were to seek to use the companies to support new mortgage-forgiveness programs that would help struggling homeowners.”

One other factor Petruno notes: “The pay packages the Treasury announced Thursday for the companies’ chief executives consisted exclusively of cash compensation; no shares were offered.”

Likely outcomes? The two firms actual value falls to zero . . .


Fannie and Freddie shares soar, but for no good reason
Tom Petruno
LA Times, December 28, 2009 | 3:37 pm

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