Fannie & Freddie Weekend Wrap Up/Linkfest

So much for a relaxing weekend! We spilled plenty of pixels on Fannie (FNM) & Freddie (FRE)this weekend, as did lots of other folks. What follows is all of the relevant commentary I could scratch together:

Here’s TBP recap:

Treasury Takeover of GSEs: 10 Key Points

Fannie & Freddie Bailout:  In terms of Conservatorship, Management, Shareholders,  Mortgages, Legislation, Foreign Holders,  Financial sector, Politics, Timing, & GSE Insolvency

Here Comes the Half Trillion Dollar Fannie/Freddie Bailout!

All of the Treasury, Federal Reserve and FDIC news releases:

Treasury Department

Treasury Department Reports (PDFs):


Federal Reserve

Chairman Bernanke

FDIC React to Takeover

Fannie Mae & Freddie Mac Shareholder Ownership, via MSN:

Federal National Mortgage Association: Ownership

Freddie Mac: Ownership   

Video Coverage:

Treasury News Conference:

Treasury Unveils Takeover of Freddie and Fannie – Part 1

Treasury Unveils Takeover of Freddie and Fannie – Part 2

Treasury Unveils Takeover of Freddie and Fannie – Part 3

John Authers, FT

GSE Bazooka Fired  Ticker Forum, Karl Denninger (Video) 


Wall Street Research

Bringing Out the “Bazooka”  David A. Rosenberg, Merrill Lynch (PDF)   

First thoughts on the market impact of the Treasury’s GSE plan, Goldman Sachs (PDF)

Paulson Begins Gradual Wind-Down of GSEs within Conservatorship,  Institutional Risk Analyst      

Pershing Square Capital Letter to Treasury Department Regarding Fannie and Freddie

What the Mainstream Media had to say:

Monday, September 8, 2008

Mounting Woes Left Officials With Little Room to Maneuver WSJ

Fannie, Freddie Credit-Default Swaps May Be Settled Bloomberg

U.S. To Take Over Mortgage Giants Fannie, Freddie NPR Audio

The Dilemma of Fannie and Freddie  NYT

In Crisis, Paulson’s Stunning Use of Federal Power  Washington Post

The How, Why and What Of Fannie-Freddie Plan  MORNING BRIEF


Few Stand to Gain on This Bailout, and Many Lose NYT

Fannie, Freddie aftershocks: More bank woes CNN/Money

No End Yet to the Capital Punishment  WSJ

As Crisis Grew, a Few Options Shrank to One NYT

U.S. Takeover of Fannie, Freddie Offers `Stopgap’   Bloomberg

U.S. Poised for Bigger Role   WSJ
Mortgage Bailout Marks the Return Of Federal Activism

Fannie, Freddie and You: What It Means to the Public  NYT

Paulson’s Seizure  The New York Sun

Big intervention should assure America’s recovery  Times of London

Sunday September 7, 2008;

A delicate balance in the Freddie and Fannie action  FT
NOTE:  This is by Mohamed El-Erian, PIMCO’s CEO

U.S. Unveils Takeover of Two Mortgage Giants  NYT

and my favorite headline, if only for its uniquely wonderful timeliness:

S&P slashes Fannie, Freddie preferred stock to junk Reuters, September 7, 2008 

Treasury Extends Secured Credit Line to Federal Home Loan Banks   Bloomberg

Washington takes over Fannie Mae, Freddie Mac  MarketWatch

Paulson Engineers US Takeover of Fannie, Freddie  Bloomberg

After The Bailout  Forbes 

Fannie and Freddie 101   CNN/Money

US takes over key mortgage firms  BBC

Fannie, Freddie Takeover Changes the Game,

Takeover seen easing loan crisis  Boston Globe

Fannie, Freddie: The biggest losers 
Fortune: names largest shareholders: FRE: Bill Miller, the Legg Mason
(12%), Capital Research & Management of Los Angeles, (10%)
AllianceBernstein (6%),  Pzena Investment Management, both of New York
(5%). FNM: AllianceBernstein (12%), Capital Research (11%), Dodge &
Cox 11%).

U.S. Outlines Fan-Fred Takeover  WSJ

U.S. seizes Fannie and Freddie  CNN/Money

US mortgage giants Freddie Mac and Fannie Mae taken into public ownership Guardian

How plan protects taxpayers  CNN/Money


Saturday September 6, 2008:

Paulson Plans to Bring Fannie, Freddie Under Government Control Bloomberg

U.S. Nears Rescue Plan For Fannie And Freddie Washington Post, A01

Questions, and Hope, on Plans for Mortgage Giants NYT

Pulling the Trigger for Fannie and Freddie?   Barron’s (Online 9/6/08)

US government takes control of Fannie and Freddie  FT

Friday  September 5, 2008;

U.S. Near Deal on Fannie, Freddie  WSJ Online

Paulson Meets With Bernanke, Fannie Mae, Freddie Mac Chiefs  Bloomberg

Former Regulator: Move On Freddie, Fannie Now Washington Post

U.S. Rescue Seen at Hand for 2 Mortgage Giants   NYT

And what else is being said around the blogosphere:

Fannie and Freddie’s Bust and Deeply Flawed Government Bailout  Nouriel Roubini, RGE

Fannie/Freddie MBS: Have You Ever Seen One? Bill Gross Must Not Have  Mr. Mortgage

Bye Bye Banks: Freddie and Fannie Preferred Holders to Take Big Hits?  naked capitalism

Paulson’s Statement on Freddie and Fannie with a Nearly Simultaneous Translation JESSE’S CAFÉ AMÉRICAIN

Fannie and Freddie: CDSs, $1.47 Trillion Triggered  The Financial Ninja

Don’t Say You Weren’t Warned Financial Armageddon

Winners, losers in the U.S. takeover of Fannie/Freddie Money & Co,

GSEs and Other Financial Institutions Overstate Capital Base Mish’s Global Economic Trend Analysis

Who Holds the Old Maid?  John Mauldin, Investor Insight

The Fannie/Freddie Bail-Out: Why Now?

History: Fannie, Freddie Seized by Federal Government Housing Wire

Having It Both Ways  Floyd Norris, NYT

Fannie & Freddie Thoughts  Calculated Risk

Details and Text on the Fannie/Freddie Bailout  Infectious Greed

The Fannie-Freddie bailout: As much as they need  LA Times

Fannie, Freddie, and Schrodinger’s Cat Economics Unbound

Fannie/Freddie – Massive Fraud Breakdown  Mr. Mortgage

Bush Administration Social Democracy: Smart or Dumb? The Semi-Daily Journal Economist Brad DeLong

The Reality Based Community and Frannie   Bronte Capital

Freddie, Fannie: No Exit?  EconLog

Freddie, Fannie and (Sort of) Federal Home Loan Bank Bailout  naked capitalism

The Frannie Bailout and the Prisoner’s Dilemma    Market Movers

What if we didn’t bail out the creditors?  Marginal Revolution

U.S. Government Default: Good, Bad, or Just Plain Ugly?  Liberty & Power

Rescuing Frannie  Market Movers

Why is FRE/FNM Being Underplayed?   Infectious Greed

Fannie and Freddie, and Why the Accounting Gimmicks Continued  Robert Reich

Just one question on the Fannie and Freddie bailout The Mess That Greenspan Made

Paulson Rolls The Dice At Taxpayer Expense  Mish’s Global Economic Trend Analysis

The rescue of Fannie and Freddie by Hankie and Feddie  Willem Buiter, FT

Fannie and Freddie Enter the Presidential Race  Washington Wire

Obama, McCain, Fannie and Freddie: A Troubled Love Story  Deal Journal

Fannie and Freddie Go Under: Yes, This Was Predictable  Dean Baker, American Prospect

Freddie-Fannie Takeover: Good news or Bad News?  Economics Unbound

HousingPANIC calls for the resignation of Ben Bernanke, who just weeks ago said Fannie and Freddie would be just fine   HousingPANIC

Older, worthwhile reading:

Fire the bazooka  Economist, Aug 28th 2008

The way forward for Fannie and Freddie   Lawrence Summers July 27 2008,dwp_uuid=5db90a0e-4e6c-11dd-ba7c-000077b07658.html

Moral hazard misconception  Ricardo Caballero, Martin Wolf, Lawrence Summers
FT  July 14, 2008

Fannie Mae Looks Like Hell  November 16, 2007

Compensating Taxpayers in the Fannie Mae and Freddie Mac Bailouts 
Ingo Walter | Jul 16, 2008

An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac
Elisa Parisi-Capone
RGE, Sep 5, 2006


If I missed anything worthwhile, please add in comments, and I will move the items up top eventually . . .


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What's been said:

Discussions found on the web:
  1. Spector commented on Sep 7

    Any guess which way the futures will react to this? Or how the foreign markets will take this?

  2. Roger Bigod commented on Sep 7

    The company had made decisions that, while not necessarily in violation of accounting rules …
    — Gretchen Morgenstern, NYT, 6 Sep 2008

    … the war situation has developed not necessarily to Japan’s advantage …
    — Hirohito, Emperor of Japan, 15 Aug 1945

  3. Curious commented on Sep 7

    I wonder why we haven’t connected the dots between Bill Gross’s announcement Thursday morning on PIMCO’s website that his firm would no longer be buying any bank or mortgage paper without further Federal assurances, the subsequent 3% drop that day of the markets worldwide, and Paulson’s announcement on Saturday that, indeed, the Gov’t will insert itself.

  4. John Borchers commented on Sep 7

    The common and preferred are worthless on FRE and FNM since they will take the losses first and the gov’t owns 80%.

    Israel banks are up today, interestingly enough.

    Anyone that gave FRE or FNM the loans they used to fund the mortgages is guarenteed.

    So basically all other banks but FRE, FNM and any other close to BK should rise come monday.

  5. Paul Jones commented on Sep 7

    It is good to know that there is somebody like Barry Ritholtz. Sir, you outdo the cable news channels and newspapers who have billions more dollars and thousands more people to work with.

    The ball is in the foreign creditors’ court. Will they be happy with the status quo, and if not, will they do anything about it or continue with business as usual?

  6. BG commented on Sep 7

    Thanks Barry for one heck of a job on pulling all of this information together in one place.

    Great Job!!

  7. Johnny B Good commented on Sep 7

    As Belushi so succinctly stated in Aninal House: “Did we give up when the Germans bombed Pearl Harbor?!!!”.

    Pay no attention to the man behind the curtain!

  8. Eric commented on Sep 7

    Cramer’s got this one right —- the market SCREAMS higher on Monday. Shorts are going to feel like guinea pigs at a snake farm. I think the SKF gaps below 100 and moves as far as the low 90s.

  9. JustinTheSkeptic commented on Sep 7

    I’m sitting this one out…”it don’t make sense to fool Mother Nature!!!”

  10. Youngtrader commented on Sep 7

    Great round-up BR.

    SKF here at 116. Cut it or hold out?

  11. JustinTheSkeptic commented on Sep 7

    But if I had alot of money I’d buy the world and be a rational king, a practical king…oh hell, I think I’ll just be China.

  12. Elvira commented on Sep 7

    You are just amazing. Thank you so much.

    As to a comment from Curious: about connecting the dots…

    I think you and I may have had dot connection issues, but the big banks and the crashing markets clearly were a one two punch to the US Gov’t to do something and do it now.

    Wasn’t there a nice hissy fit around the time of the Bear Sterns fiasco too, and then weren’t the markets on a steady trend higher for the next few months.

    I am betting on some nice sailing through to that Presidential Election in US.

  13. cloudy commented on Sep 7

    so where does it end? automakers next? how about that medicare? maybe inevitable and maybe necessary, but it is indeed a sad day in America.

  14. D.Rich commented on Sep 7

    I’m not finished pouring through this mountain of #!X$^&, but it really seems to me to be a half-assed attempt to do as little as possible and push the ultimate disaster down the road.

  15. Undercover commented on Sep 7

    This isn’t about the old MBS, not really. This is about the rest of the banks repackaging (new) MBS to sell to the GSE’s at par. This is the “fix” for the insolvent banking system and represents the “all clear signal” for banks to pile onto the GSE bailout fund. This is a mechanism for loss transfer. This is a false-flag operation to re-capitalize an insolvent banking system. Lockhart said specifically that the GSE’s would be able to expand the book with no limitations. What does this mean to you? NO LIMITATIONS TO THE SIZE OF THEIR BOOK. The book will swell like mad until all banks have offloaded the l3 garbage, and then the shadow-inventory will be dumped. PAULSON DEFRAUDED THE AMERICAN PEOPLE……AGAIN.

  16. Bill Miller commented on Sep 7

    Bill Miller, the Legg Mason mutual fund manager, was Freddie Mac’s largest shareholder as of July 31, with 12% of the company’s stock.

    Others Freddie investors include Capital Research & Management of Los Angeles, with a 10% stake as of June 30, and AllianceBernstein and Pzena Investment Management, both of New York, with 6% and 5%.

    Holders of Fannie common shares include AllianceBernstein, with 12% of outstanding shares, and Capital Research and Dodge & Cox, of San Francisco, each with 11%, according to data from

  17. Peter Thal Larsen commented on Sep 7

    Lehman in fresh shake-up of top executives

    The head of Lehman Brothers’ international operations is stepping down, triggering a broader shake-up of senior management at the embattled Wall Street bank.

    Jeremy Isaacs, the long-serving chief executive of Lehman’s businesses in Europe and Asia, is giving up his executive role and will leave the bank at the end of the year, according to people briefed on the plans.

    Benoit Savoret, chief operating officer for Europe and the Middle East, and Andrew Morton, promoted this year to run Lehman’s key fixed income division, are also stepping down.

    The shake-up, the latest in a series of management changes at Lehman in recent months, comes as the bank tries to shore up its balance sheet, which has been weakened by the credit crunch.

    The bank has been talking to the Korea Development Bank about buying a stake and the Financial Times has learnt that Royal Bank of Canada considered buying the bank in July, but decided against a deal.

    One leading institutional shareholder in Lehman says the investment bank’s negotiations with RBC and other potential investors raise doubts about whether the current round of talks will succeed.

  18. Jodie commented on Sep 7

    Markets opening.
    Stocks up big.
    Dollar down.
    Treasuries down.
    Oil up.

  19. Eclectic commented on Sep 7

    One of your better jobs in all these years, Barringo!

    We get an incredible amount of quality here for free. Good job and thanks for being a news and analysis hound.

    On the whole Freddie and Fannie business:

    Net, net… I expect this will improve confidence in credit markets and just might have prevented a total freeze-up of the commercial paper market… a disaster of proportions even the most pessimistic of us could hardly fathom.

    The circular diagrams of relative portfolio size and mortgage market vol that you reprinted in an earlier post – and the smallest circle representing Fannie and Freddie’s relative net worth – tell the story completely.

    As you well remember, Benber N. Anke’s most significant writing to date was last year’s Jackson Hole epistle. You may remember that I analyzed it almost line-for-line.

    Fannie and Freddie would’ve never gotten into this situation had they not decided to Trip The Light Fantastic and attempt to magnify their returns on the backs of the very providers of equity capital that give them their bread and butter… the good faith buyers of their syndicated mortgages… by hedging them to the brink of destruction.

    By doing that, they ran the risk of collapsing the asset prices of the investors that sustain their core mission and purpose… but unfortunately for them, they’d acquired too great a portfolio of those instruments for themselves. Thus, they wrote the check for their own demise.

    Reckless EBITDA… Reckless pro-forma EBITDA… Reckless Supply Side Hocus Pocus Economics. Reckless, reckless… reckless.

    Now, the government will re-in-stall the core purpose of Fannie and Freddie, with or without any fractional preservation of shareholder equity (that’s not clear to me yet) and in doing so, the government just might not (I say might not) take a loss.

    Poor Fannie and Freddie… they’d have been contentedly sitting on only reduced expectations for income, not the expectations for a collapse of their net worth, had they simply s-t-a-y-e-d with the purpose that was their bread and B-U-T-T-E-R.

  20. Monkeyfister commented on Sep 7

    I’m still wondering who is going to pay those depart Executives’ severance packages.

    It seems minor, perhaps even petty to spend time considering the issue, but my tax-paying self really doesn’t appreciate paying for these asshats’ Golden Parachutes. Their failure and corruption has been compensated and rewarded enough.

    I’d say it’s time for them to simply leave after the Government is done with them, and be happy that they still have paychecks for another few months. They’re not exactly living hand-to-mouth methinks, they can suffer with the rest of us down here for a while… enjoy the fruits of their labors.


  21. Ugh Ughstein commented on Sep 7

    Over/Under on when we see Richard Syron in handcuffs?

    November 1st?

  22. JustinTheSkeptic commented on Sep 7

    Knock-a’nother-homer Hank! But wait??? They tore old Fulton County Stadium down…not to mention Milwaukee County Stadium.

  23. JustinTheSkeptic commented on Sep 7

    Will the true home-run king please stand up and bow! Paulson, Paulson, he’s our man…if he can’t do it, go fishing.

  24. JustinTheSkeptic commented on Sep 7

    Jodie, you don’t happen to be one of those cross-gender types? :-)

  25. JustinTheSkeptic commented on Sep 7

    Oh BR…just having fun on such a frivolous occation. lol

  26. Jodie commented on Sep 7

    The deflation meme should be dying just about now!

  27. leftback commented on Sep 7

    Banks will surge and a lot of other crap will surge as well. Sit it out for a day or two, then it’s back to business as usual for the intrepid shorties. None of this is going to alter the fact that retail is going to hell in a hand-basket.

    Treasuries will sell off, gold will pop, pretty sure about that one. Trading small until we can see the new landscape and keeping an eye on the technicals. 1300 and even 1350-1360 (the 200DMA) are not out of the question. Know your enemy…

  28. Jodie commented on Sep 7

    Justin put the wine glass down right now :)

  29. KJ Foehr commented on Sep 7

    Markets look to scream higher at the open. Up 4% for the day? Or fade after the gap higher open?

    S&P 500 SEP08 1267.30 +2620
    NSDQ100 SEP08 1802.75 B +3275
    RUSSELL SEP08 732.00 B +1350
    5$ DOW SEP08 11423 +196
    GLOBEX Prices as of 09/07/08 05:32 PM

  30. leftback commented on Sep 7

    A big ugly screamer of a squeeze.

    Stand back.

    A big vote of thanks to Barry for decoding all of this and for being a voice of sanity.

  31. JustinTheSkeptic commented on Sep 7

    But Jodie, it’s only 6:55 and the markets don’t open until…Hank Paulson says they do! :-)

  32. Mark E Hoffer commented on Sep 7

    Just a reminder to the grateful fans of BR: his mailbox works.

    Past that, we should take an over/under poll on U.S. Capital Control implementation.

    It’s Ironic, at a weblog called “The Big Picture”, so many of its commenters are wedded to the tick-by-tick (charts) that CNBC loves soo much..

    BR thanks for swinging the, metaphorical, Machete, you do much to tame the Wilds.

  33. devalera commented on Sep 7

    Great work Barry. You have done an awesome job pulling this all together as it broke. Cable news sucked as this came out and they talked over the newsmakers. Nice work. I’m getting ready to harvest some banks tomorrow.

  34. John Borchers commented on Sep 7

    Futures up 3%. Too good to be true. It won’t hold.

    People are forgetting Bob and Mary can’t borrow against the home value anymore for everyday needs and buying stuff that’s shiney. That’s gone for years.

    Let deflation continue, with or without the gov’t support.

    That will be the real shocker. Interest rates don’t work and values for everything continue lower.

  35. Lars commented on Sep 7

    Can’t help but wonder what’s next. Are we out of the woods with financials, or are there still massive losses to be unwound? How far and wide will Uncle Buck have to go to save the economy?

  36. Monkeyfister commented on Sep 7

    It’s 7:10pmCDT, and I’ve noticed that US Market Futures have shot waaay up, while Asian, European and other markets are tanking.

    In the end, how is this new debt obligation going to impact the US Dollar?


  37. Bailout commented on Sep 7

    #1. How much will the shareholders get, per stock?
    #2. Are shareholders likely to file a law suit (Bill Miller, Legg Mason)?
    =>#3. Could there be a “Bear/stern” attempt to increase the compensation 5 fold ($2 to $10)?

  38. John Borchers commented on Sep 7

    After careful reading of all Barry’s material link I’ve decided to move my money out of the stock market come market close Monday morning (which looks like a 3% day) and invest the entire bundle in REITs. Future contributions will go into SPY.

    I’m going to move my money where the gov’t is backing and eliminate it from where they aren’t backing.

    P.S. – I’m young enough to lose the whole thing and come back if it goes wrong.

  39. Lysander commented on Sep 7

    @ Monkey Fist. Nikkei seems to be up 2% in the first couple of minutes. We’ll see after that. I do expect a rally of more than just a day, but probably not more than a week. Fundamentally, If the bailout is huge, the dollar falls, gold and oil go back up. May take a while for that to sink in, though, but there is no free lunch. If governments could fix market problems through a back room deal over the weekend, the housing crisis would have been solved long ago.

  40. Jim Haygood commented on Sep 7

    “People are forgetting Bob and Mary can’t borrow against the home value anymore for everyday needs and buying stuff that’s shiney.” — John Borchers

    Nope. Cuz Bob & Mary are just little consumers. Whereas what they need to be are originators — mortgage originators. If Bob & Mary would just write themselves, and their neighbors, some conforming mortgages and whip ’em into an MBS on the kitchen table, why they could sell it to the Treasury and get a check from the New York Fed!

    I’m on Chapter 3 of my forthcoming book, “How to Create and Sell MBS for Megabucks in Your Spare Time.” Why risk your capital on shaky real estate, when you can manufacture paper and get a government check at a guaranteed price? When crime pays, you gotta think like a criminal to succeed.

  41. John(2) commented on Sep 7

    European and US markets will probably be up strongly tomorrow mainly because they seem willing to jump on any fragment of good news. It can’t be sustained because consumer spending in the US will remain in the tank. This move has prevented a potential complete halt in the housing market and also, as others have pointed out, it slopping over into the commercial paper market which doesn’t bear thinking about. So short term bounce, then back to business as usual when the next set of retail or employment numbers pop out.

  42. a guy called john commented on Sep 7

    eclectic! it’s been a while, no? good to see you back.

  43. John Borchers commented on Sep 7

    Here’s a question to ponder. Did real estate values come up so much as a response to unmeasured rising inflation?

  44. guerilla extortionists commented on Sep 7

    so what percent of mortgage holders need to stop paying their mortgage to bring the Fed Govt to its knees? Maybe form a union of mortgage payors, threaten to not pay unless Govt recasts your mortgage. Maybe bring down PIMCO, too. Either that or let the Govt eat it. Of course, we have met the enemy and it’s us.

  45. Ann commented on Sep 7

    It looks like the preferred equity holders will essentially be wiped out as well. While most bank stocks should scream higher, some banks hold big positions in the GSE preferreds as a percent of their equity.

    Ten banks that will be hurt by the FNM and FRE Government Takeover…

  46. Greg0658 commented on Sep 7

    as soon as the money was loaned out; then spent on a home, a cycle, a vacation, whatever; the common taxpayer was on the hook at that moment … if that money borrowed was not capable of being repayed to that original loan institution forcing that institution to file for bankruptcy or offer itself for a takeover at pennies on the dollar; the common taxpayer is hooked, line and sinker already … all we are talking about is who’s gonna own this stuff post mega sale (granted its still big big money)

    I gotta admit its quite a system for the lawyers, accountants, professional marketeers these days … but what a crappy system for the play by the rule guys

  47. Greg0658 commented on Sep 7

    since I’m not a lawyer, accountant, or professional marketeer I’m left wondering if the item “$1B per GSE represents an ownership stake of 79.9%” means a meer $1 Billion gives someone controlling stakes? the other half of that item “senior preferred stock with a 10% coupon” may be what I don’t understand

    I suppose I should stop trying to micro manage the money system in my life; just go to work, make money, pay bills/taxes; and just be Happy :-)

  48. Mark E Hoffer commented on Sep 7

    Ann, nice link.

    And, Isn’t it funny that, with all the pixels spilled on Frannie, et al., noone has even commented on how “Mortgages”, themselves, actually work?

    Please, someone tell me that Banks loan Money..and the Tooth Fairy gets a bad rap!

  49. Mark E Hoffer commented on Sep 7

    BR, feel free to excise this, but, from anon’s link:

    In one of my more spectacularly awful recommendations, I suggested in my Mar. 10 column that readers buy stock in Fannie Mae (5, FNM) at what seemed then to be the ridiculously low price of $35. My reasoning was that the housing market’s woes were well advertised and the stock was trading at a value that reflected a tremendous amount of pessimism.

    Well, not all the pessimism that was due. The quality of the mortgages guaranteed by Fannie Mae continued to erode more than even I had anticipated. Analysts are now expecting 70% of subprime loans to default, with a loss of 70 cents on the dollar for those defaulting notes. Prime borrowers with pristine credit histories, meanwhile, are deciding–in one of the more extraordinary behavioral shifts I’ve ever seen–that there is nothing ethically wrong with defaulting on a mortgage if the property becomes worth less than they paid for it. The viability of Fannie and Freddie Mac (nyse: FRE – news – people ) is being challenged each day; their capital adequacy is legitimately in doubt, and nationalization is on the table. In the worst housing market since the Depression, owning a very highly leveraged mortgage lender hasn’t been a great idea.

    At this point, valuation of both Fannie Mae and Freddie Mac (4, FRE)–which I haplessly recommended at $29 in the Apr. 21 issue–requires as much political as economic analysis. No one, including the institutions themselves, is able to project the length or severity of the housing decline. The capital they are required to hold will be determined by their new regulator, the director of the Federal Housing Finance Authority, who will set capital requirements and who must consult with the Federal Reserve board of governors to “ensure financial market stability.”

    So what’s an investor to do? Fannie and Freddie are facing not only losses (like the $2.3 billion and the $821 million that they respectively owned up to for the second quarter) but dilution as well. The solution to their capital shortfall will include shrinking their portfolios, cutting their dividends and issuing new equity, both common and, most likely, convertible preferred. Not a happy prospect. The good news, if there is any, is that Fannie and Freddie are now trading like very long term housing-market call options. They have just raised the guarantee fees they charge lenders for handling their mortgages to a level that for the first time is set in a way that reflects the credit quality of the loans. They are now a de facto duopoly that completely dominates the market.

    For the taxable investor, I’d suggest taking losses. If you bought Fannie, sell it and hold Freddie instead for 31 days; then get back into Fannie. The 31 days will keep you from having a “wash sale” problem with the IRS, and holding the sister stock will reduce your risk of getting whipsawed–seeing mortgage stocks rebound just when you’re on the sidelines. If you bought Freddie, sell it and buy Fannie.

    For tax-deferred accounts, I’d take a big breath and double down, buying more at the current low prices. Risks include the housing market getting even worse and equity holders getting hammered by a Treasury intervention. Not a trivial possibility.

    Another suggestion I’d make, for those readers I haven’t already horrified, would be to purchase the perpetual preferred stock issued by Fannie Mae. I’d avoid Freddie’s, for I think its problems are more severe at the moment: It needs more capital, it kept expanding its balance sheet far too long, and it hasn’t yet raised its guarantee fees. Normally I’d run away from perpetual preferred, which has no maturity, for when purchased at par it has all the downside risk of an equity and the upside only of a bond. In the current environment, however, I’d buy the FNMA 8.25% Series S Preferred, which is selling at a deep discount to its $25 par. It pays an 8.25% dividend (calculated on its par value) until Dec. 13, 2010, when the dividend resets to the three-month Libor rate plus 4.23%, with a floor of 7.75%. It is a noncumulative preferred, so if a dividend is missed the company doesn’t have to make it up in the future. But it can’t pay dividends on the common while the preferred dividend is suspended. At a price of $12 its current yield is 17.2%. It’s callable at par every five years starting on Dec. 13, 2010–but the possibility of being forced to take $25 in cash for your $12 stock is not something to lose sleep over.

    Why is it likely the dividend will be paid? Fannie is allowed to count perpetual preferred as regulatory capital. If the company were to eliminate the dividend, it would lose access to the market and destroy this source of funding. Also, the largest purchasers of this issue have traditionally been regional banks, and the last thing the Fed and the Treasury want to do is to put additional strain on the commercial banking system.

    Lisa W. Hess is a New York money manager. Visit her homepage at

    the only good thing you can say about it is that, at least, she signed her name to it.

    another one that should understand they can’t be understood..

    “and nationalization is on the table.”

    FFR y’all, anyone using this phrase: “on the table”, is a serious risk to your well-being

  50. Eclectic commented on Sep 7

    man called john,

    Thanks, has been a while.

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