I dont think CMBS has much to do with these stocks. I want to see where the senior GSE debt and CDSs are trading at
Another fun trading day for those who are short FRE and FNM. They make WM and LEH look like a sound investment.
This is actually a pretty tough call for the treasury, I am interested to see what they do but wouldn't want to be in their shoes. It looks like two bad choices. If they had to liquidate now at the current market values there would obviously be nothing left for the shareholders, but in their old deal that doesn't matter- they can stay in business unless regulatory capital went too low or they missed a debt payment. Their capital is (or at least was) measured with a formula agreed upon by their regulators that doesn't mark to market, and I am pretty sure they still have enough by this definition. They can still make debt payments as long as the market keeps letting them refinance their short term debt. And they are so leveraged that it wouldn't take a huge move in market values for mortgages to put them back in the black on an economic/fair value basis, and this is not at all out of the question if they are allowed to hang on a little longer. So if they are shut down too soon and shareholders are wiped out they have a right to be pissed. But from a policy point of view, management is now in a position where they have a huge incentive to ramp up the risk, and it is pretty much in the shareholder's interest for them to do so. They are like guys in a casino with one chip left, why not put it on the roulette table? So the longer they are allowed to hang on the bigger the worst case bill to the taxpayers gets.
I agree with this analysis. The gov't cannot afford to let FNM/FRE to completely fail because of the additional economic damage it will cause but if they pull the plug before they get to that point then they can't give the shareholders nothing since the shareholders will rightly claim that the gov't action was premature (e.g. they were solvent when they were taken over) At these price levels its a pretty low risk bet to go long on either; I don't see the shareholders ending up with zilch, especially coming on the heels of the BSC precedent.
I partially agree with your analysis - if shareholders get zero then they can complain that the government intervened while they were solvent. The simple solution to this is to do a capital raising that is substantially dilutive (eg. $10b plus of preferred). In that situation, the common equity may still have some value, but that value may be measured in cents rather than dollars - particularly for FRE.
Another point to consider is that if the govt really wants to force a bailout, they can just make a verbal statement that FNM/FRE have no government backing for the debt. The stock will immediately be worthless and the companies won't be able to refinance. The govt can then take over both entities on the terms of their choosing. Ideally they should pay cents on the dollar to bondholders, so that PimpHo and other crony "capitalist" sharks don't get to feed on the carcass of Joe Taxpayer. But let's be realistic, this is the most economically socialist administration since Nixon and there's no way they are going to put the interests of voters ahead of a bunch of faceless financial institutions, foreign corporations and SWFs.
stock almost certainly wont to go $0.00, meaning it wont be worthless(because they wont file for bankrupcty) -shareholders can sue the government and get some kind of recovery -if the treasury tries an acquisition bill miller and other managers will try to vote the deal down(claming the regulators,bernanke, paulson recently said they were solvent) -if its preferred, there is still 'hope' that the stock one day will be worth something when housing recovers and the government is repaid. equity is supposed to be worth the cashflow you can take out over 50-100 years