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August 21, 2008

Fannie and Freddie – The Sequel

‘Fannie and Freddie’ – it sounds like the title of happy Disney family movie, but yet to many these two names are the equivalent of a horror film they do not necessarily want to watch.

However, the scenario is still open to negotiations, as we have not seen anything concrete. Some people talk about liquidation, and some about nationalization of the two largest US mortgage companies. What strikes as a far more likely scenario to me are government guarantees of certain securities or preferred stock repayable to their great benefactor, the US government.

The shares of the two mortgage companies have plummeted in the past weeks, Fannie May’s share price lost almost 94% of its value year on year, marking a new record low of $4.40 yesterday, in New York Stock Exchange composite trading. Last time the stock was selling at similar levels was in Jan. 11, 1989. Freddie Mac’s stock has declined 95.1% year on year, marking a record low of $3.20 today.

The agencies now need to refinance $225 billion of senior debt by the end of September. But investors are getting increasingly worried and might not opt to include the two agencies debt in their portfolios. The big fall in both companies’ share prices indicates how badly the investors want to see Washington articulate some details of any potential government bailout, as the general sentiment is that the US government’s involvement will focus primarily in protecting bond holders (debt), and not equity holders.

Fears that the two mortgage giants will no longer be able to function are shared by both analysts and investors, as this is an issue that would probably cripple the US housing market which is already on crutches.

On the other side of the ‘battlefield’, it seems that the US government is not as fond of the nationalization scenario for the two agencies, as the UK government was in the case of Northern Rock; hence Treasury is already in the process of developing other safer options to be used if a market seizure forces them to interfere.

One Response to “Fannie and Freddie – The Sequel”

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