Freddie Mac Shareholders to Get (Dean Baker) Baked

So much for all those who misinterpreted the statements of Treasury Secretary Paulson, by believing that Paulson said he was going to step in and support the price of Freddie Mac and Fannie Mae stock.

The misinterpretations included a doozy by Dean Baker, who specializes in finding minuscule errors in economic reporting (A pimple on an elephant kind of stuff). No problem finding Baker's errors though, they are like nuclear bombs going off by accident. Chernobyl has nothing on this guy. Baker actually headlined his error after I pointed it out in the comment section of an earlier post he made. The headline on the Baker post:

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

He then wrote:

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.

We responded to his post this way:

I have not seen anywhere, where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.... Anyone reading Baker's posts, and buying Fannie or Freddie stock based on Baker analysis that the Treasury is bailing out shareholders could very well get baked big time.

The baking is about to began.

In its earnings press release today, Chairman and CEO Richard Syron stated:

We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate.

The current market cap of Freddie s $4.2 billion and heading south fast. A raise of $5.5 billion at current levels(The stock is trading at 6.50 per share) would require an offering of approximately 840,000,000 shares. There are currently approximately 647 million shares outstanding. Thus a raise at current levels would require an increase in the number of shares outstanding by approximately 129%.

That's if Syron can pull it off on his own. And, Syron will discount the stock as much as he has to get the deal done, since he doesn't want Treasury to step in and buy stock. If the Treasury steps in, the price could be significantly lower than the current bad news price.

UPDATE: Here's how bad things really are for stockholders: “Either investors are going to be massively diluted given the amount of equity they are going to need or they are going to be nationalized,” Dan Alpert, managing director of Westwood Capital LLC in New York, told Reuters. “Without a larger equity capital base, they are going to be incapable of surviving. We don’t think $5.5 billion even scratches the surface.”

Freddie CEO: Home Prices Could Fall Another 20%

U.S. house prices will fall by as much as 20 percent nationally and the current mortgage finance crisis is about half-way through, according to Richard Syron, the chairman and CEO of Freddie Mac.

"Previously, we said house prices would fall at least 15 percent nationally, peak to trough. Today's challenging economic environment suggests that the housing market is far from stabilizing," Syron, told investors in a conference call held to discuss the company's earnings."As a result, we now believe that national home prices will fall 18 to 20 percent peak to trough. ... The long and short of it is that we now think that we are half-way through the overall peak-to-trough decline."

These "half-way through" forecasts are being derived by forecasters looking at the potential number of future problems, including payment option mortgages. They then look at when specific problems should hit and the size of the problems. This is a pretty good basic forecasting method, with one BIG caveat: Ben Bernanke. If the Fed continues to slow money growth, like it has over the last three months, things could be much worse, on the other hand, if the Fed spikes money growth, the housing market problems could clear up much faster than expected. Bernanke is the key.

Fed Denies Talks On Discount Window Access For Fannie and Freddie

Federal Reserve officials haven’t discussed discount-window access with Fannie Mae and Freddie Mac, a Fed spokeswoman said Friday, according to WSJ.

“Federal Reserve officials are following the situation closely, but there have been no discussions with the GSEs about access to the discount window,” Fed spokeswoman Michelle Smith said when asked about a report that Fed Chairman Ben Bernanke had told Freddie Mac’s chief executive that the GSEs were eligible to use the facility.

Reuters reported Friday that Bernanke told Freddie Mac Chief Executive Richard Syron that Freddie Mac and Fannie Mae are eligible to use the Fed’s discount window, citing a source with knowledge of the conversation. Also on Friday, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said “there are a number of things, including things like the discount window, that they’re, I know, considering.”