Fannie, Freddie shares dive on zero-value prediction (Are Fannie Mae and Freddie Mac now worthless?)

Los Angeles Times ^ | 10/19/2009

[SeekAndFind]

A new analysis of loss-ridden mortgage giants Fannie Mae and Freddie Mac tries to nail shut the coffin on their common stocks.

In a report, financial services research specialist Keefe Bruyette & Woods says the companies’ shares would have zero value under the workout scenario the firm believes is most likely: the creation of new Fannie and Freddie entities as mortgage guarantors owned by the banks that use their services, while the government continues to support the old Fannie and Freddie loan portfolios as they wind down.

Keefe may not be telling speculators in Fannie and Freddie shares anything they didn’t already suspect, but the report still must be spooking some of those players today: Fannie’s shares were down 25 cents, or 17%, to $1.21 at about 10:45 a.m. PDT; Freddie was off 31 cents, or 18%, to $1.41.

"There is general consensus that the primary role of the agencies in the future is in the loan guarantee business and not in the investment business," Keefe analysts led by Bose George wrote in the report. "By creating ‘bad banks’ of the existing portfolios and putting the existing portfolios into receivership, the government can limit its losses and define its role in supporting the mortgage industry through the crisis and create an exit strategy."

But that exit strategy would leave nothing for shareholders, the Keefe analysts assert. They believe that the companies’ combined $96 billion in debt to the Treasury -- which seized them 13 months ago after saying the firms were in danger of failing -- will grow in the near term as mortgage defaults continue to rise.

[SeekAndFind]

Even presuming that the old Fannie and Freddie portfolios would earn net operating profits over the next 10 years as the mortgage crisis abates, the companies still would have negative equity at the end of that period because of what they owe taxpayers.

"In this scenario, both the common and preferred equity of the [companies] should be worthless," the firm says. "Our bad bank analysis suggests that the companies will still owe the government almost $100 billion by the end of year ten. As a result, we are ... cutting our price targets to $0."

[FromLori]

http://www.marketwatch.com/story/kbw-says-fannie-freddie-shares-worthless-2009-10-19

[SeekAndFind]

I have to add that the analysts are right. However, they have not considered one thing -— they underestimate the government’s willingness to continue throwing good money after bad.

The federal government hasn’t shown much concern about limiting taxpayer expense. I haven’t seen many Democrats suggesting that such a drastic solution is being considered, or would be supported. Instead, I would expect more of the same: the government will continue to increase the bailout amount needed for these entities, pretty much ad infinitum.

[FromLori]

http://www.marketwatch.com/story/kbw-says-fannie-freddie-shares-worthless-2009-10-19

http://www.daytondailynews.com/news/dayton-news/drop-in-foreclosures-called-very-scary-352689.html

http://www.businessinsider.com/how-the-government-caused-the-mortgage-crisis-2009-10

http://www.businessinsider.com/20-year-old-buys-home-with-183000-fha-loan-and-just-35-down-2009-10)

[smokingfrog]

Less than worthless?

http://quote.morningstar.com/Stock/s.aspx?t=FNM

[Red Badger]

They’ve been worthless for quite some time now......................

[Kartographer]

"(Are Fannie Mae and Freddie Mac now worthless?)"

To paraphase my Daddy: They are worth about the same as tits on a boar hog.

[CharlesWayneCT]

I remember the good old days, March of 2008, when the democrats were trying to fund their “stimulus” package by taxing the windfall profits of Fannie and Freddie.

[Vince Ferrer]