Barron's predicts Fannie and Freddie shareholder wipe out.

Discussion in 'Stocks' started by, Aug 17, 2008.

  1. The problem with Fannie and Freddie is that depending on how you count the beans, their liabilities are worth more than their assets. Using so-called fair value accounting -- which marks their assets and liabilities to immediate market value -- Fannie is worth $12.5 billion (a sliver of equity supporting $2.8 trillion in assets) and Freddie has a negative net worth of $5.6 billion. Others calculate that both have a negative net worth of $50 billion.

    The Bush administration wants to gut these GSEs (they're Democratic strongholds). How will the GSEs perish? Barron's reports that if Fannie and Freddie fail to raise at least $10 billion in fresh capital, the administration is "likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie's and Freddie's existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends." But wait, there's more.

    The White House also wants to exact vengeance on Fannie and Freddie's management. It will replace management, limit their investments, and sell their assets before reselling them to the public or merging them with other GSEs. In particular, Barron's writes that "Treasury would install new management and directors at both, curb the GSEs' sometimes reckless investment and guarantee operations, and liquidate in an orderly fashion the GSEs' troubled $1.6 billion in on-balance-sheet investments. Then the companies could be resold to the public without their explicit government debt guarantees, or folded into government agencies like Ginnie Mae or the FHA."

    Whatever amount of taxpayer money is used to bail out Fannie and Freddie, I hope that the government uses the $38 million earned by taxpayers such as Richard Syron, Freddie's CEO, and the other executives and directors of Fannie and Freddie, before it uses my taxes. Then they can go after the pay of those government regulators who were supposed to be supervising them.

    They should pay the first price for their mistakes.
  2. Your a fool. LONG BOTH OF THEM.

    Some of you bearish morons don't know whats good for the country, do you?

  3. Daal


    Man, barrons got it right finnaly.
    And for ETF, if the world thinks 130-1 leverage is imprudent(shown by the fact that people dont operate under this type of business structure) and if THIS crisis wont take down a 130-1 business then what will?
  4. You go first. We'll watch.

    Say hello to comrade Ben for us.

  5. Arnie


    Exactly HOW are they good for the country?
  6. As long as the process of natural selection is thwarted and interfered with, the species as a whole will wither and die over time. Unfit individuals will be allowed to survive and pass on their unfit genes.

    In English, the market is being prevented from eliminating the weak players. They will be allowed to survive and perpetuate their unfit practices.
  7. And 'Red Dawn' Ben Bernanke will ensure that responsible savers and taxpayers bail out their reckless behavior.

    Give that man a hammer and sickle. It's harvest time, comrade!
  8. S2007S


    The next test of investor sentiment towards the GSEs will come on Tuesday when Freddie is expected to price $3bn of five-year reference notes. Its existing five-year note was quoted on Monday at a spread to Treasuries of about 105 basis points.

    Article continued here:
  9. Exact same prediction as my blog. My reasoning was not the negative net worth comment, but the extent of the leverage facing each institution. I don't know any trader or fund that can "manage risk" without losing a couple percent every now and then. I estimated they can afford to lose 200 basis points on their assets before their networth goes to zero. Essentially each basis point move in their asset pool is worth $100,000,000 or $100 million. So when rates start to go up, consider the size of the pool of assets in mortgages they have, all of FNM and FRE will be worthless. The only thing that will stop both stocks from going to zero will be support buys from the treasury, which will lose all of their investment in each company.

    It's even simplified to having $15 billion of equity supporting $1 trillion+ of liabilities. Even combining both company's assets still has leverage that cannot survive any significant changes in rates. Leverage is astronomically high that each basis point in long term rates is a catastrophic loss for each company, and I don't think that that has been priced in, these stocks'd be worth a couple cents.

    I don't think Barron's analysis is wrong about FRE having negative net asset value, but both of the stocks are essentially long 1000 ES contracts with just a couple hundred thousand of equity with margin buying of 4:1. Never a good combination.
  10. so FRE and FNM own or guarantee $5.3 trillion worth of mortgages

    so it's only a guess as to when the gov. prints the money to pay off defaults.

    and the 2 companies are still buying crap mortgages, unless something has changed
    #10     Aug 18, 2008