Freddie Mac. Fannie Mae to be taken over, by the Treasury

7 comments Written on September 6th, 2008 by
Categories: Commentary
The U.S. treasury is likely to take over Freddie Mac and Fannie Mae:
Under the plan, which could prompt one of the most sweeping government interventions in financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies' common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares might be protected by the government.
Shares are likely to go to zero, or close. After-hours trading shows at 20% drop in each of their share prices.

The plan isn't very clear since it only involves the treasury covering losses, and there's not much mention of fresh investment or for growing the business. If FRE/FNM business does not grow, the real estate market in the US is hosed anyhow. This idea only protects against too much PAST damage.

This will have worldwide repercussions. A lot of worldwide funds will be looking nervously at these developments - and yes, we in India will definitely be impacted.

Note: In the US, there's a difference between common and preferred stock - preferred is the equivalent of Indian debentures. Common is what is listed, and that is likely to be wiped out. The preferred is likely to be protected either all the way, or to a certain part, based on how the conservatorship will be structured. Details available soon, I guess.

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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@capitalmind.in.

7 comments “Freddie Mac. Fannie Mae to be taken over, by the Treasury”

>Last month Bank of China sold a big chunk of Fannie/Freddie Bonds. Then came the news that Korean Government Foreign Exchange Reserves are predominently invested in these Bonds. Hence this action (only symbolism) is meant to soothe the Bond Holders. There is no doubt that Fannie and Freddie are the largest Hedge Funds of the World. Now US Currency and Treasury Bonds are backed by worthless and depreciating Leveraged Real Estate Bonds. As the US housing slump worsens much more implosion will be possible from unexpected quarters.

>Deepak,
Just a thought crossed my mind. Comes a time US govt decides to put a flooring for FNM FRM as karachi stock exchange? but just fir these two big entities which have been said that MUST NOT FAIL.

Cheers

>Arpan here Deepak. Several questions:
1) Do FNM/FMC hold Indian stocks? These will be butchered in the next few days/weeks/months
2) Do global hedge funds, the so called big guys, have FNM/FMC bonds? Then they’d have to cover up their losses – easiest way right now is short. Particularly India which is well over 14k right now and should be close to 12k for reasonable value.
3) Gold is not exactly shining so cannot invest out there either and we have no commodity funds in the real sense of the term. Those that are there are correlated, nothing more.

What to do? FD? FMP?

Regards

>Siddharth: One would not expect that from the US. Plus, this is not a shareholder rescue, it might only end up saving all or part of bondholder equity.

Anon: 1) I doubt it – FNM and FRE only hold mortgages as assets.
2) Global funds could have some exposure. Shorting the bonds makes no sense, and the stock, well, it’s 80% down from last year.
3) Gold is still a fantastic trade according to me.

Right now is a good time to do nothing. Leave your money in a liquid fund – the time and place to invest may only be visible in a while.

>Deepak,

Do you know why other companies besides FNM/FRE haven’t historically provided mortgage credit risk insurance? It seems similar to other types of insurance.

Regards,
Max

>Deepak,
It means US will be printing more money. Of all these negativity, why does US dollar strengthening day by day. Some how, it is defying the gravity of the situation.

>Deepak,
Looks like Hank has temporarily floored all the financials, at least for the time being. The least you expected of this flooring from USA, turns out to be exactly opposite, Murphy’s Law?