Saturday, August 16, 2008

Barron's: It's Near Curtain Time for Freddie and Fannie

As we have pointed out a number of times, the Dean Baker contention that the Treasury was bailing out Freddie and Fannie shareholders was utter nonsense . See for example: Freddie Mac Shareholders to Get (Dean Baker) Baked .

Jonathan R Laing at Barron's is preparing the obituaries, right now:

IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac. It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses...

Heaven knows, the two government-sponsored enterprises, or GSEs, both need resuscitation. Soaring mortgage delinquencies and foreclosures have led the companies to gush red ink for the past four quarters, and their managements concede the outlook is even grimmer well into next year...

Similarly, the balance sheets of both companies have been destroyed. On a fair-value basis, in which the value of assets and liabilities is marked to immediate-liquidation value, Freddie would have had a negative net worth of $5.6 billion as of June 30, while Fannie's equity eroded to $12.5 billion from a fair value of $36 billion at the end of last year. That $12.5 billion isn't much of a cushion for a $2.8 trillion book of owned or guaranteed mortgage assets.

What's more, the fair-value figures reported by the companies may overstate the value of their assets significantly. By some calculations each company is around $50 billion in the hole...

Amazingly, shares of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) have lost around 90% of their value in the past year, but Fannie still is trading at $7.91, and Freddie at $5.88 , which means that Baker has a lot of cult like followers, or there are a lot of other clueless investors out there.

Laing BTW reaches the conclusion of a $50 billion combined negative net worth because both companies carry on their balance sheets a tax credit entry called "deferred tax assets." These increase Fannie's net worth by $36 billion and Freddie's by $28 billion. They don't represent real cash, but are merely paper credits built up over the years. The worse shape the companies are in, the greater these credits are. To insolvent companies like FRE & FNM, they are meaningless accounting entries.


  1. Wow, you're giving me credit for the 90 percent decline in the share prices of Fannie and Freddie? that's pretty good, I had not idea that I had the power to destroy $100 billion of market value and sink two otherwise healthy corporate giants.

    I'll have to think about who I should do in next. Let's see Bear Stearns, someone else already got them. Maybe IndyMac? Nope, too late with them too. Maybe Citi and Merrill? Nope, they're pretty much sunk also. I guess us bad guy fearmongers have already done in most of the financial sector. If it were for us, I'm sure things would still be just rockin on Wall Street.

  2. Ah, no Dean. That's your ego out of control, again. The subprime crisis took care of the 90% drop.

    You would be responsible for the stocks trading far above zero, since you are the one that claimed shareholders were going to be bailed out by the Treasury--when no such thing is going to happen and the stocks will be dluted down to near zero.

  3. Okay, so I'm responsible for $10 billion on the long side, instead of $90 billion on the short side. Well, that's still pretty good. I want my $2 billion (don't the hedge fund boys get 20 percent).

    For the record, I am fairly confident that Fannie and Freddie shares will end up near zero. The bailout last month was an opportunity for more informed investors to get out with some of their money. The Treasury was doing a holding action. At the end of the day, they are not going to be able to prop up these companies against all the bad debt that they will be seeing.

  4. When did you get "fairly confident" that Freddie and Fannie are headed to zero. You weren't on July 24 when you wrote:

    Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

    The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level. Without this commitment, short sellers would see these two bankrupt giants sitting there with positive valuations and push their price very close to zero.

    This is as much a bailout as if Treasury just sent a multi-billion dollar check to be
    divided among the shareholders. This is exactly the sort of nonsense that Treasury invents so that it can do a bailout without owning up to it. Reporters are supposed to catch this sort of deception and inform the public of what is really going on. Paulson is betting that the U.S. press corps is sufficiently incompetent that the public will not realize that they are being taxed to reduce the losses of Fannie and Freddie shareholders.

    --Dean Baker

    Just admit it, you misunderstood what Paulson said.