Freddie (FRE) & Fannie (FNM) 01 (May 08 - Feb 12)

[ishak]

Freddie Mac debt sale weak, bailout concerns rise
REUTERS, August 18, 2008

NEW YORK - Freddie Mac's latest debt sale drew anaemic demand on Monday, a day after Barron's reported an increasing likelihood the US Treasury may essentially take over Freddie and rival Fannie Mae.

The weekly financial newspaper said such a move could wipe out existing holders of the largest US home funding companies' common stock, with preferred shareholders and even holders of the two government-sponsored entities' US$19 billion of subordinated debt also suffering losses.

Bonds issued by the two 'agencies' sharply underperformed Treasuries, and their shares slid by more than 9 per cent on the New York Stock Exchange.

Merrill Lynch also weighed in on Freddie Mac on Monday, saying it will likely raise fresh capital in the third quarter, comprised of at least 50 per cent common stock. Merrill also cut its price target on the company.

'Lukewarm was my overall characterisation,' Nancy Vanden Houten, analyst at Stone & McCarthy Research Associates, said in an email of Freddie Mac's US$4 billion debt sale on 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,' Ms 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 US$2 billion 3-month issue, down from 2.73 a week ago. It also fell to 2.42 from 2.92 for the US$1 billion of 6-month bills. The bid-to-cover ratio for the US$1 billion of 12-month bills was 1.75, down from 2.50 per cent at the prior sale of this maturity on July 21.

[ishak]

US likely to recapitalise Fannie, Freddie
REUTERS, 18 August 2008

NEW YORK - The US Treasury is growing increasingly likely to recapitalise Fannie Mae and Freddie Mac in the months ahead on the taxpayer's dime, Barron's reported in its Aug 18 edition.

The weekly financial newspaper said that such a move could wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' US$19 billion of subordinated debt also suffering losses.

An insider in the Bush administration told Barron's that Fannie and Freddie 'are being jawboned' by the Treasury Department and their new regulator, the Federal Housing Finance Agency (FHFA), to raise more equity.

But government officials don't expect the agencies to succeed, Barron's reported.

If the government-sponsored enterprises fail to raise fresh capital, the administration is likely to mount its own recapitalisation, with Treasury infusing taxpayer money into the agencies, according to the Barron's source.

The paper reported 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.' The report called an equity injection by the government a quasi-nationalisation - without having to put the agencies' liabilities on the US balance sheet, and thus doubling the US debt.

After accounting for deferred tax assets and generous asset marks, Fannie and Freddie each may have a negative US$50 billion in asset value, and little prospect of digging themselves out of the hole, Barron's reported.

[ishak]

Fannie and Freddie hit 20-year low
www.theroyalgazette.com, August 19. 2008

NEW YORK (AP) - Wall Street retreated yesterday after Fannie Mae and Freddie Mac fell to their lowest levels in nearly 20 years on concerns that the government might need to bail out the mortgage financiers. Weakness in the overall financial sector sent the Dow Jones industrial average down more than 175 points.

Investors were again uneasy about the health of financial companies after media reports of further problems in the sector. Barron's said the US Treasury might have to bail out government-chartered Fannie and Freddie, which, the weekly noted, would likely wipe out shareholders' equity in the companies.

Meanwhile, The Wall Street Journal, citing unidentified sources, reported that Lehman Brothers Holdings Inc. might surprise Wall Street with weaker-than-expected third-quarter results.

The continuing bad news about financials wasn't a surprise, but it nonetheless depressed a market that is hoping for concrete signs that banks and brokerages can put the year-old credit crisis behind them and return to significant profit growth.

Even neutral news about the housing market couldn't ease Wall Street's mood. The National Association of Home Builders monthly index on the housing market remained flat at 16 in August. That met the expectations of economists surveyed by Thomson Financial/IFR. Benchmarks related to current sales and expectations of future sales improved, but apparently not enough to move investors to buy.

Todd Leone, managing director of equity trading at Cowen & Co., said the worries about Fannie and Freddie dominated market sentiment in an otherwise light day.

"It'll be one of the slowest days of the year and I think it just kind of fed into itself," he said, referring to the effects of very light volume and the unease over the mortgage companies.

...

[ishak]

The way these two are dropping, it will really be nationalised soon.

FNM: 4.85 (Down 19.30%)
FRE: 3.30 (Down 20.86%)

[kennynah]

The way these two are dropping, it will really be nationalised soon.

are they not originally?

[ishak]

What's Driving Fannie and Freddie
Seeking Alpha, August 20, 2008

Fannie and Freddie are down again; the shares are so cheap at this point that even a relatively modest fluctuation of less than 80 cents in the Freddie (FRE) share price will hit the headlines as a 20% move. The fact is that they're not plummeting this morning, as the headlines would have it: they've plummeted already, and now they're fluctuating at levels modestly around zero since no one really has much of an idea what the option value of the shares might be.

Why are the shares at zero (plus a little something for option value)? Because Hank Paulson is a ball-buster, as he proved with Bear Stearns, and if he's going to have to inject capital, the markets are convinced that he's going to require the existing shareholders to be wiped out. He doesn't have to do that, of course, but he will: after all, if government capital is the only thing keeping the GSEs functioning, then it's hardly fair that the primary beneficiaries of that capital infusion should be the shareholders rather than the taxpayer.

The more interesting question is why the GSEs are still paying such a high premium to fund themselves. Freddie paid 113bp over Treasuries to issue five-year notes yesterday, even though Paulson has made it crystal clear that he stands behind that debt.

Here's my theory: Any company's bond spreads naturally gap out whenever its stock approaches zero. In this case, there's a countervailing force -- the moral hazard play, whereby you don't trust Freddie the standalone entity to pay you back, but you're pretty sure that someone (the US taxpayer) will cough up if push comes to shove.

The problem is that although certain hedge funds might be perfectly happy making that moral hazard play, most of the people who historically buy GSE debt like to think that they're buying something which is more or less risk-free in its own right. Yes, they've historically been reassured that there's a government backstop, but there's a difference between being reassured by the backstop and relying on it.

So let's say that a large number of historical buyers of GSE debt (like, say, the Chinese government) decided that if they wanted to take US government risk, they'd much rather just buy US government debt, rather than relying on not-entirely-explicit pronouncements from the Treasury secretary. Right now, there's not a huge amount of liquidity in global debt markets, and the absence of those buyers can drive rates up quite a lot. It might look irrational -- it might be irrational -- but it's not hard to see how a company in trouble will have difficulty raising billions of dollars these days, no matter how much government support it has.

[ishak]

Fannie & Freddie Trading Should Be Halted: Cramer
By CNBC.com With Wires, CNBC.com, 20 Aug 2008

As investors dumped shares of Fannie Mae and Freddie Mac for the third straight day, CNBC's Jim Cramer urged that trading in both stocks be stopped altogether because they were being manipulated by people with insider information.

"This is an outrage," Cramer said shortly after the market closed. "It's very clear that someone knows what's happening."

Cramer blamed regulators, including the Securities and Exchange Commission and New York Stock Exchange, for not stepping in to halt trading in the shares on the possibility of insider trading.

"They used to stop trading when it was clear that there were some people who knew what was going on and others don't," he said. "There's no cop on the beat anymore.

"There's so much confusion, so much money changing hands," he added. "It's just so unfair to the little guy."

Cramer also cited the resumption of so-called naked short-selling, which the SEC stopped for several weeks over the summer, for the sharp decline in Fannie and Freddie shares.

The SEC imposed the rule, which required investors to actually borrow a stock before selling it short and deliver the stock on the settlment date, to crack down on possible market manipulation that some blamed for steep declines in the shares of financial companies.

But the rule was lifted on Aug 12, allowing investors to short a stock as much as they wanted.

This week's selloff in Fannie and Freddie was ignited by a Barron's article saying the government might have to bail out the two mortgage financing giants, effectively wiping out their stock value. By Wednesday, both Fannie and Freddie had reached 18-year lows.

"People who are selling this aren't just making conjecture," he said. "Now Barron's had an article this weekend. They claim they had a Treasury source. That person should be outed."

Fannie Mae Chief Executive Daniel Mudd, speaking Wednesday on National Public Radio, reiterated that the company has more capital than it has ever had and that it has not asked nor been offered help from the Treasury.

Closely watched hedge-fund manager Doug Kass, who has placed big bets that Fannie Mae shares will fall, said on Wednesday that the seriously depressed stock of the two companies will drop to zero, dismissing Mudd's comments about its capital adequacy.

"What Mudd didn't say is that the company is too leveraged to a depreciating asset—housing—and losses are off the charts and [there are] no signs of stability," Kass said in an interview with Reuters.

Kass said he believes there will be "some de facto government rescue" of the companies, probably in the form of a series of extremely dilutive financings.

Meanwhile, PIMCO bond chief Bill Gross told CNBC that the Treasury will need to provide as much as $40 billion to recapitalize the troubled mortgage giants.

He was too slow to take a piece of the action.

[ishak]

Forgetting Freddie (and Fannie)
Commentary: It's time to start thinking about the impact of a GSE bailout
By David Weidner, MarketWatch, Last update: Aug. 21, 2008

Financial bailouts are supposed to save institutions. So why does the imminent takeover of Freddie Mac and Fannie Mae seem like a Russian peacekeeping mission in Georgia?

On Monday the government sponsored mortgage entities tumbled 20% after Freddie was forced to pay unusually rich terms to sell $3 billion in debt. Shares of Freddie brushed an all-time low Wednesday. Confidence in the lenders is eroding even though Treasury Secretary Henry Paulson sought and received congressional permission to spend taxpayer money to prop up the GSEs.

Just based on the raw numbers, this shouldn't be happening. Fannie and Freddie barely touched the subprime and Alt-A loans that have been blamed for so much of the credit crisis. And while many homeowners are hurting, the number of defaulted loans is about 2%, less than half of the rate in the great S&L crisis, according to the Federal Deposit Insurance Corp. That's industry-wide, not at the GSEs where lending standards are much higher.

So, even though logic says this shouldn't be happening, it is. The idea of Fannie and Freddie going the distance is something we need to let go of. Yankee fans should understand.

Accepting the situation, let's do some triage: Fannie and Freddie have purchased about $5 trillion in U.S. mortgages, or about half of the home loans outstanding. While it's pretty clear what the loss would be to the U.S. economy and housing market, the impact on Wall Street has been less discussed.

It's hard to imagine any institution or investor gaining from a GSE bailout. Everyone seems bound to suffer. But there are some that are more at risk of losing than others. So, let's sort out the bodies:

Commercial banks

Banks and thrifts are in the business of making loans, and there is no bigger loan the U.S. consumer will take on than a mortgage. If banks can't sell these loans to Freddie or Fannie it would follow that the trickle of failures today would accelerate into a flood. Without buyers, big mortgage lenders such as Washington Mutual Inc., Bank of America Corp. and Wachovia Corp. will be in deep trouble -- just as B of A.'s Ken Lewis thought he had heard the last of the criticisms of the $4 billion buyout of the nation's biggest home lender, Countrywide Financial Corp.

Banks and thrifts also hold more than $1 trillion in Fannie and Freddie bonds because they are considered as good as cash. Without a bailout, banks and thrifts would have to raise more capital because GSE debt would have to be written down or sold.

Debt markets

Believe it or not, residential mortgage-backed securities are still being underwritten and sold. Volume is down 81% year-to-date from the same period last year, but through Aug. 18, 280 RMBS deals valued at a combined $161 billion had been issued, according to Dealogic. Even at those bare minimum levels, RMBS volume represented about 11% of all debt capital market issuance through July 31. The research firm also points out that $33.9 billion of those bonds will mature by yearend, a third of that amount in December alone.

A wipeout in the debt markets would, in its most basic ways, hurt the biggest underwriters of fixed-income debt. The three biggest underwriters of debt, J.P. Morgan Chase & Co., Citigroup and Merrill Lynch & Co. have recorded a combined $2.1 billion in revenue from debt underwriting through the first seven months of the year. The industry revenue is $10 billion during the same period, about a third of total investment banking revenue, according to Dealogic.

Shareholders

Let's just say it's not as if they haven't been warned. In a bailout equity holders may see their stake nearly wiped out. If the U.S. Treasury buys stock it, will dilute current shareholders. To avoid hurting taxpayers, the Treasury would probably only invest at a discount that severely penalizes shareholders.

In March, those shareholders were led by Legg Mason Inc. , AXA and Capital World Investors. Big Wall Street holders included Citigroup Inc. and Morgan Stanley but five months later, who really knows?

Direct pressure

Finally, there are two direct ways a GSE bailout could threaten big brokers.
First, a bailout could put one of the Street's steady, albeit small revenue streams at risk. The GSEs use Wall Street muscle to move debt. That expensive bond issue that spooked the market this week was sold by Citigroup, Deutsche Bank AG and Merrill Lynch.

Underwriting revenue topped $1.5 billion combined for the top underwriters of GSE debt through the middle of July. Merrill at $73 million in revenue received the most fees, according to Sanford C. Bernstein & Co. research.

It's this part of the market that Paulson is seeking to protect by providing government backing. So, there's probably not much risk in this cash disappearing right away. But what if the system is overhauled completely as many have suggested?

Secondly, GSEs are counterparties to the derivatives market and Bernstein estimates they have a $2 trillion exposure in the market. No one seems to be sure how these commitments will be handled in a shake up.

Derivatives, revenue, debt markets -- you get the picture. Just when it couldn't get worse, right?

Just one question: If this is a "bailout," what's a failure like?

[kennynah]

i still maintain that these 2 institutions will survive this crisis... the us govt cannot afford to let these 2 die... if so, many many more foreclosures will happen. in addition, without these 2 to reinsure the bank loans, the mortgage rates will not be able to go down.... making the housing slump recovery, even harder...so, just these 2 reasons, are enough to make sure they survive and prosper in time...

the incoming president will sure tout pro-fannie/freddie legislatures to ensure they get voters support to their presidential campaigns...

long term play... these 2 counters look like they deserve a place in portfolio...long term ok...

[Chiron]

In the worst case scenario, both are nationalized to protect the mortage market and majority of the the American house owners. This will wipe out the shareholders' equity.