What did it mean to investors when Freddie & Fannie shares jumped (27% and 21%) and their trading volume for both was the highest since late October?

Not much. The most recent political news is that the White House has granted the former GSEs a blank check — no cap on aid. (Hence, why they are now former GSEs). That was the cause of their share price rally. But what does this mean for the companie’s future?

Nothing good. It signals that Uncle Sam will likely use the firms — the government owns 80% of both — to intervene further in the housing market.

Here’s Tom Petruno with the details:

“But whatever additional federal money flows into Fannie and Freddie would almost certainly come at the expense of shareholders’ remaining stake. The government now owns 80% of both firms.

The administration is supposed to announce its long-term strategy for Fannie and Freddie in February. The companies’ losses could continue to balloon if, as some analysts suspect, the White House were to seek to use the companies to support new mortgage-forgiveness programs that would help struggling homeowners.”

One other factor Petruno notes: “The pay packages the Treasury announced Thursday for the companies’ chief executives consisted exclusively of cash compensation; no shares were offered.”

Likely outcomes? The two firms actual value falls to zero . . .

>

Source:
Fannie and Freddie shares soar, but for no good reason
Tom Petruno
LA Times, December 28, 2009 | 3:37 pm

http://latimesblogs.latimes.com/money_co/2009/12/fannie-mae-freddie-mac-stocks-obama-treasury.html

Category: Bailouts, Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

53 Responses to “Fannie, Freddie, Heading to Zero”

  1. call me ahab says:

    “It signals that Uncle Sam will likely use the firms — the government owns 80% of both — to intervene further in the housing market.”

    blanket principal and rate redutctions for all loans associated w/ purchases within the peak bubble period- whether requested or not w/ no qualification required so liar loans can get in on the action!

    possible?

  2. Mannwich says:

    It’s a crime (and utter farce) that these two garbage bins are still publicly-traded “companies”.

  3. torrie-amos says:

    us gubment will come out in feburary and announce, they are taking over the mortgage market, only way to control home prices, which is there goal or states and counties will take a tax pounding

  4. Don’t those of us who made prudent purchases — reasonably priced homes within our personal budgets — feel like fools?

  5. Mannwich says:

    @BR: We do. We do indeed. Why bother being responsible? We constantly reward just the opposite everywhere you look in our culture today. It’s beyond sad.

  6. Advocatus Diaboli says:

    An article that uses ‘calpers’, ‘ethics’ and ‘rules’ in the same sentence.
    ——–

    Calpers tightens ethics rules for board members

    CHICAGO (Reuters) – The California Public Employees’ Retirement System Board , the largest U.S. public pension fund, has tightened policies governing board members’ involvement in investment decisions, it said on Tuesday.

  7. that’s a tough one BR..

    matters, I suppose, if one, actually, “looks in the Mirror” while shaving..

    but, really, it doesn’t matter, as long as the FedRes is the center of our Monetary Universe, Chumpy, who overextended on a NINJA pay-option ARM to cram his ego into home-debtorship, is, merely, a distraction.

    or, differently, there are Branches, and, then, there is the Root.

    “uni-lateral disarmament”, or not..

  8. Mannwich says:

    On a related note, started reading the book “Lords of Finance”. I guess I’m a little surprised by just how things haven’t changed all that much with people since back in those days. We keep repeating the same mistakes over and over again. Of course, they aren’t “mistakes” if you’re one of the “chosen” in this country and elsewhere. They’re not only perfectly planned, but mighty acceptable.

    ~~~

    BR: My favorite Friedrich Hegel quote: “The only thing we learn from history is that we learn nothing from history.”

  9. call me ahab says:

    BR-

    The way I see it the USG will do anything and everything possible to defend asset prices- period. And the USG can and will use its power if necessary- regardless of public opposition- think confiscation of gold in the ’30′s as an example- and internment of all Japanese during WWII. If it needs to – to shore up finances- the USG will make penalties for withdrawals from IRA’s and 401k’s 100% and make purchases of treasuries mandatory in any retirement account.

    Legal? Fair? Does it matter?

  10. callistenes says:

    Come on Barry they’ll just do another 1-20 reverse split and the clowns will still trade it.

  11. troubled times says:

    Get Lanny Davis on the TV and blame the shorts.

  12. leftback says:

    It looks as though FNM and FRE are being set up as the “bad bank” to hold as many RRE assets as possible so that they do not have to be recognized. Now we have to wonder where they are going to offload the CRE assets to…?

  13. Mannwich says:

    @lb: To their little sister, Ginnie, perhaps?

  14. “It looks as though FNM and FRE are being set up as the “bad bank” to hold as many RRE assets as possible so that they do not have to be recognized.” lb, above

    good point~ yes, they’re Laundromats..

  15. Steve Barry says:

    The plan is working to perfection…give the illusion that we dodged a bullet so corporate insiders can get out…they have been selling at eleveated levels since the market low. (scroll down on the link below to see the chart). Doubt they will announce any bank failures this week (New Year’s Eve)…but next week there should be 7 or so, then 5 a week. Funny how banks only close on Friday evenings.

    http://online.barrons.com/public/page/9_0210-instrans.html

  16. call me ahab says:

    manny @ 2:45-

    all part of the new “bailout culture”

    some ugly precedents have been set- I guess we can look at it as the culmination of the sense of entitlement Americans have developed over the last generation-

    failure? please – we are entitled to success or at the very least do-overs-

    mulligan anyone?

  17. leftback says:

    Climate Gate gone, commenters return… coincidence ??

    Excellent commentary, BR. Any idea what nonsense they will use to try to rescue the “Prime Jumbo” Crowd ?

  18. Pete from CA says:

    “those of us who made prudent purchases feel like fools”

    Doesn’t this help to prop up the value of your home? I think the real fools are those who were prudent and did not buy…

  19. call me ahab says:

    “Doesn’t this help to prop up the value of your home?”

    value is meaningless if your home is unencumbered and not used as collateral-

    I can only hope that the nonsense associated w/ a home purchase as an investment dies a quick death

  20. Mannwich says:

    Exactly, Steve. The insiders are making one last mass money grab before they get out and it all falls apart in grand fashion again.

  21. Robespierre says:

    “But whatever additional federal money flows into Fannie and Freddie would almost certainly come at the expense of shareholders’ remaining stake.”

    Actually at the expense of tax payers since anyone who bought any shares of these companies knew very well that they were gambling and did so voluntarily. This new money is being allocated illegally by the executive branch without a vote in congress. Can we impeach these guys already or must we wait until they run the country to the ground?

    ~~~

    BR: I am against the bailouts, but how do you figure illegal? Its TARP money . . .

  22. Steve Barry says:

    “us gubment will come out in feburary and announce, they are taking over the mortgage market, only way to control home prices, which is there goal or states and counties will take a tax pounding”

    They better do something for the states…google “state budget deficit” and see how many states come up…NY, AZ, MN, CA, SC, CT, PA, NJ, HI…practically all of them.

    http://news.google.com/news/search?aq=f&um=1&cf=all&ned=us&hl=en&q=state+budget+deficit

  23. leftback says:

    MTA Bus Cuts

    Lord Blankfiend will have to walk through the Park on his way home. Scary.

  24. leftback says:

    http://www.nytimes.com/2009/12/30/nyregion/30bus.html

    No HTML tags allowed, Barry?

    ~~~

    BR: I am not sure what you mean by that

    This whole post is HTML tagged

  25. Mannwich says:

    @Steve: Property taxes are soaring hear in Minneapolis and they STILL can’t manage to plow the neighborhood streets in a timely fashion. Apparently the snow removal budget is already at its max in December, if you can believe that. I guess they were planning on having very little snow this winter.

  26. MayorQuimby says:

    “Robespierre” – love it!

  27. [...] Fannie, Freddie, Heading to Zero Guess who is paying for their unlimited creditline? You! [...]

  28. They will not stop, ever, until the currency and the economy are completely destroyed. There is absolutely nothing that can stop it now because nobody with clout wants it to stop. How much more obvious does it need to be for people to understand?

  29. rootless_cosmopolitan says:

    @Barry:

    “Don’t those of us who made prudent purchases — reasonably priced homes within our personal budgets — feel like fools?”

    Sucker! -;)

    rc

  30. OverMan says:

    Yeah you can’t just give a blank check and say go for it… Something is going to give!

  31. leftback says:

    > Test

  32. ab initio says:

    The “system” is designed to screw the prudent – those that pay their taxes (unlike TurboTimmy); those that save from current income (thanks for the 0.01% Tbill yield); those that did not purchase a home during the bubble (now has to pay for the neighbors home mortgage principal reduction), etc, etc

    Welcome to the land of the free lunch where money can be printed at will and everything is hunkydory all the time!

  33. rootless_cosmopolitan says:

    Mannwich:

    “On a related note, started reading the book “Lords of Finance”. I guess I’m a little surprised by just how things haven’t changed all that much with people since back in those days. We keep repeating the same mistakes over and over again. Of course, they aren’t “mistakes” if you’re one of the “chosen” in this country and elsewhere. They’re not only perfectly planned, but mighty acceptable.”

    Well, with respect to what criteria are these “mistakes” really mistakes then?

    Perhaps, these “mistakes” repeated again and again after every financial boom were the ones that have helped capitalism with surviving up today in the first hand. Save capitalism by saving the investing and owning class first. Since credit is the fuel of capitalism, saving the creditors among the investing class by making them whole despite bad investment and making sure they have confidence that they can expect profits from their investments also in the future is more important than saving shareholders. And the taxpayers are the least important ones in this. Playing along this script has been the main focus of government intervention since the beginning of the GFC, I would say. The main purpose of most of the measures, starting with the non-recourse loan for JP Morgan Chase related to the purchase of Bear Stearns, then TARP and all the trillions US-dollars to support the financial industry has been to bail out the bondholders, make the creditors of the US-economy whole, whether the domestic or foreign ones. Making it possible for Fannie and Freddie to buy out nonperforming loans at 100% par on a large scale and move losses from creditors to the government balance sheet in this way totally fits into this:

    http://www.calculatedriskblog.com/2009/12/credit-suisse-uncapping-fannie-freddie.html

    rc

  34. Mannwich says:

    @rc: That’s precisely why I put the word “mistakes” in quotes. Rightly or wrongly, it was all intentional to save the elites back then as it is now at any/all costs to everyone and everything else (and since the beginning of time).

  35. call me ahab says:

    “Welcome to the land of the free lunch where money can be printed at will and everything is hunkydory all the time!”

    wow- I love free lunches-

    where’s mine goddammit

  36. call me ahab says:

    “Making it possible for Fannie and Freddie to buy out nonperforming loans at 100% par on a large scale and move losses from creditors to the government balance sheet in this way totally fits into this”

    Freddie and Fannie will not be brought onto the Federal Balance sheet- treasuries would get crushed

  37. jc says:

    FL starting mediation on it’s 1/2 million backlog of foreclosures. It’s only for homies (FL residents) and they can opt out, articles say banks aren’t taking principal writedowns. I don’t think this will really do much for the many borrowers who are so far underwater but if a bunch of these 1/2 million homes get dumped on the market it could be interesting. More interesting!

    http://blogs.tampabay.com/realestate/2009/12/supreme-court-floridians-facing-foreclosure-get-option-of-mediation.html

  38. rootless_cosmopolitan says:

    call me ahab:

    “Freddie and Fannie will not be brought onto the Federal Balance sheet- treasuries would get crushed”

    Why would a few hundred more billion US-dollars of losses from Freddie and Fannie on the Federal balance sheet, even if it were 500 billion, spread over several years, crush treasuries? I don’t see this. Public debt of the US government is at about 40% of GDP or so. Japan’s public debt is at about 200% of Japan’s GDP and Japan’s government bonds haven’t been crushed.

    They will do it. Whatever it takes.

    rc

  39. Pat G. says:

    “Fannie, Freddie, Heading to Zero” Not so in relation to the costs to us taxpayers…

  40. call me ahab says:

    rc-

    from Bloomberg-

    “Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac own or guarantee about $5.5 trillion of the $11.8 trillion in U.S. residential mortgage debt.”

    there you have it- the USG will not bring these entities on the USG’s books- ever

    history lesson- Fannie use to be part of the US government and was spun off by LBJ to make it easier to finance the Vietnam War-

    Freddie was created later to keep Fannie from being a monopoly

  41. David Merkel says:

    From my comments to my report on financials yesterday —

    Federal Home Loan Mortgage Corp [FRE] and Federal National Mortgage Assn [FNM] Rise as U.S. Removes Caps on Assistance — this gives the GSE stocks more time, and hence optionality. I still think they will be zeroes in the end, but there will be a lot of kicking and screaming to get there. The government is engaged in a failing strategy to reflate the housing bubble, and they aren’t dead yet.

  42. rootless_cosmopolitan says:

    call me ahab,

    I don’t understand your argument. As you say, Fannie and Freddie own or guarantee together 5.5 trillion dollars of the US mortgage debt. Why do you conclude from this that the government isn’t going to take the losses from the fraction of the loan portfolios that is going to go bust on its balance sheet? The US government owns 80% of Fannie and Freddie per Preferred Stock Purchase Agreements (PSPAs). Who else will take the losses, when the value of Fannie’s and Freddie’s loan portfolios goes down?

    The purpose of the PSPAs is to pour as much money in Freddie and Fannie as needed to compensate for the deteriorating net worth of their loan portfolios:

    “At the time the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship in September 2008, Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each firm maintained a positive net worth. Treasury is now amending the PSPAs to allow the cap on Treasury’s funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years. At the conclusion of the three year period, the remaining commitment will then be fully available to be drawn per the terms of the agreements.”
    (http://www.ustreas.gov/press/releases/2009122415345924543.htm)

    At the end, either the owners of Fannie and Freddie, i.e., mostly the US government, will have to sell the non-performing loans at a loss, or these loans are being held until maturity and the owners will have to take the losses on it. Either way, the losses will be on the government balance sheet, since the agencie’s preferred shares will have been bought by issuing more government debt.

    rc

  43. dnarby says:

    Personally I think Fannie and Freddy are going to be turned into “bad banks”

    http://thetaildoesnotwagthedog.blogspot.com/2009/12/are-fannie-and-freddie-to-be-come.html

  44. Robespierre says:

    BR: I am against the bailouts, but how do you figure illegal? Its TARP money . . .

    If the blank check was up to the money allocated to TARP then it would not be illegal. That is not the case since (for what I read) they put no ceiling to what they would give to the GSEs.

  45. mathman says:

    Robespierre: where were you when Bush jr took over and created this mess with his secret, unconstitutional, fear-based, unaccountable government?

  46. Robespierre says:

    mathman Says:

    “Robespierre: where were you when Bush jr took over and created this mess with his secret, unconstitutional, fear-based, unaccountable government?”

    He is a crook too but since he is out of office very little can be done at this time. Having said that, I’m of the opinion that the US will become more and more like a banana republic where most government elected officials are up for sale. A country can only be functional if its citizens believe that justice applies more or less equally to all and if they believe that they have legal recourse against influential groups.

  47. nertopia says:

    No matter how you slice it… revolt is in the air… Great edited video using clips from “It’s A Wonderful Life”

    Are the Potters of the world running the “Too big to fail” banks?

    Check out this youtube movie which advises moving your account to a local community bank… Also the lead story at huffington post…

    http://www.youtube.com/watch?v=Icqrx0OimSs

  48. The Curmudgeon says:

    And if you think the bailouts will ever end until the end, you were wrong. Now, GMAC, that other little black hole of government largesse turns out to need yet more money to stay afloat:

    Dec. 30 (Bloomberg) — GMAC Inc., the home and auto lender that counts the U.S. government as the largest stakeholder, is discussing with the Obama administration a third bailout of $3 billion to $4 billion, said a person familiar with the matter.

    The size of the assistance is under negotiation, the person said on condition of anonymity because the talks are private. A deal may be reached in days as Detroit-based GMAC incorporates losses from its home-loan businesses, the person said.

    GMAC received two rounds of government aid totaling $13.5 billion as it struggled with losses at home-mortgage operations, which include Residential Capital LLC, known as ResCap. The primary lender to General Motors Co., its former parent, and Chrysler Group LLC is being helped by profits in auto-lending and is working to sell or restructure the ResCap unit.
    http://www.bloomberg.com/apps/news?pid=20601087&sid=ap0H4JFsSyTs&pos=4

    ~I’m too old and tired to revolt, which is the only way out of this mess that I can see. Is there another place in the world in which to escape where the long arm of The Great Leader can’t reach? The Puritans had the New World for their escape from the King’s depradations. Where do we go now?

  49. [...] to struggling homeowners. As for the companies themselves, Ritholtz makes a straightforward prediction: What did it mean to investors when Freddie & Fannie shares jumped (27% and 21%) and their [...]

  50. mknowles says:

    “The pay packages the Treasury announced Thursday for the companies’ chief executives consisted exclusively of cash compensation; no shares were offered.”
    ~~~~~~~~~~~~~~~~~Yes, I think this was $42 Million for 12 executives.

  51. nertopia says:

    [Curmudgeon]

    LOL revolt does not mean taking to the streets… Revolt is as simple as taking action with your money. Move your bank accounts to a local community bank and strike two blows… one against the big banks and one to help support your local community! I think this is within reach of everyone to take this type of action… No matter how old and tired we are! Down with the Potters and up with the George Baileys of the world!

  52. Paul Jones says:

    I think there would be value in fleshing this FRE+FNM=0 scenario.

    That won’t happen in a vacuum.

    What does the world look like on that day?

  53. Neil C Denver says:

    “Loan Forgiveness” is the equivalent of “Stealing”. It takes the tax receipts of “Responsible” citizens and gives it directly to “Less Responsible” and often “Irresponsible” Citizens.