http://biz.yahoo.com/rb/080818/fannie_freddie.html?.v=1 Freddie Mac debt sale weak, bailout concerns rise "Lukewarm was my overall characterization," Nancy Vanden Houten, analyst at Stone & McCarthy Research Associates, said in an email of Freddie Mac's $4 billion debt sale Monday. "The bid-to-cover ratios were weak for all three bill auctions. Spreads weren't uniformly bad, however." "The Barron's story seems to be getting a lot of attention, rightly or wrongly," Vanden Houten said. A bid-to-cover ratio reflects the amount of bids compared with the amount offered. A lower ratio indicates weaker demand. The bid-to-cover was 2.19 for the $2 billion 3-month issue, down from 2.73 a week ago. It also fell to 2.42 from 2.92 for the $1 billion of 6-month bills. The bid-to-cover ratio for the $1 billion of 12-month bills was 1.75, down from 2.50 percent at the prior sale of this maturity on July 21.
Here's the latest on the bailout structuring: http://online.wsj.com/article/SB121919008026355015.html?mod=yahoo_hs&ru=yahoo Series of Options Two weeks ago, Treasury hired investment banking giant Morgan Stanley to help it "analyze and understand these authorities, should circumstances ever warrant their use." Morgan Stanley bankers are working with Treasury staff to come up with a series of options it could use to shore up Fannie and Freddie depending on various market conditions. Among the issues being debated is whether to force out management as part of any investment or loan. There is also debate about what to do about the companies in the long term. If Treasury were to take an equity stake at a high price, it would benefit shareholders. Coming in at a low price would essentially wipe out the shareholders, making the government the de facto owner of the firms. It's not clear whether Treasury would treat both companies equally or devise a rescue for one and not the other. Some market observers say an investment or a loan from the government will perpetuate a model that no longer works. Fannie and Freddie are government-sponsored enterprises -- meaning they were chartered by Congress -- and yet also public companies. "The better step would have been to have legislation that would have permitted them to be taken over immediately," said Peter Wallison, a former Treasury general counsel and critic of the companies.
The highlights of that article as far as shorting goes seem to be http://s.wsj.net/public/resources/images/P1-AM636_FANFRE_20080819204418.gif looks like a bull market in distrust and "Investors are unlikely to buy new Freddie shares if they fear the government might mount a rescue that would hurt the value of those shares. Freddie executives are due to meet with Treasury officials Wednesday to discuss the situation and the two sides may explore whether the Treasury could clarify its intentions in a way that would reassure investors." I had no idea what Paulson will say but if he says he wont wipe out shareholders in order to stimulate a capital raising this will generate a short squeeze of gigantic proportions(in addition to being a stealth bailout) but if he just pounds on 'we have no intention of using the authority, raise capital guys', then we have a reflexive situation at work since the more investors fear a treasury intervention and dont help on the capital raise the more likely the intervention becames. That article made me realize it could be likely paulson will say he wont wipe everybody out if he thinks enough capital will be raised. so the question is, is there enough capital to be raised by private investors. it doesnt look like there is enough demand(only $5b for FRE and still havent gone through) and even if there is its likely the discount on the private market will be big(this is not the kind of market for $20-$30b offerings), dilluting everybody anyway. regardless I got my buy orders ready in case something crazy happens
"James Lockhart, director of the Office of Federal Housing Enterprise Oversight, the regulator of Fannie and Freddie, cut short his vacation to deal with the crisis, Fox Business reported Wednesday." ok its serious. I though treasury was going to take its time but now its likely they will do something soon
Nothing that isn't already out there: (1) FRE meeting with Treasury (WSJ) (2) Bloomberg story about $200 billion in bonds to rollover before end of September. The answer is probably quite simple: today it (finally) sunk in that common equity holders will get zero (or close to it) when FRE and FNM are nationalised. For reasons I am unsure, that concept did not sink in as much on Monday or Tuesday.
We may very well have a BSC situation where the Treasury takes over Fannie and Freddie over the weekend followed by the Fed making a .25% cut in the discount rate on Sunday to clam the markets. $2 is far too generous though. Maybe 2 cents.