Posted on 07/17/2008 9:40:22 PM PDT by politicket
Mortgage giant Freddie Mac -- emboldened by emergency regulatory actions that have triggered a two-day rebound in its battered stock -- is considering raising capital by selling as much as $10 billion in new shares to investors, according to people familiar with the matter.
The high-stakes maneuver would have the potential to avoid a full-blown government rescue for Freddie Mac and Fannie Mae, twin keystones of the U.S. housing market. The publicly traded, government-sponsored companies own or guarantee about $5.2 trillion of home mortgages, or nearly half the total outstanding, and are at the center of government efforts to prop up the sagging housing market.
Both companies' stock fell about 45% last week amid worry about whether they have enough capital to cover mortgage losses. The depth of their troubles spurred the Treasury Department on Sunday to unveil an unusual plan to temporarily extend an unspecified credit line to both companies -- as well as buy stock in them if necessary.
(Excerpt) Read more at online.wsj.com ...
When you have a “Get Out Of Bankruptcy Free” card, courtesy of the Federal Government, it’s “no worries, mate!”.
Funny that they can claim they are “well-capitalized” in one breath and concoct a plan to sell $10 billion in shares in another. But, if they were well-capitalized, they wouldn’t NEED to raise cash, would they?
Liars and charlatans. More lies will need to be told to get that much stock sold, especially after the dead cat bounce this week.
This sounds like a good idea to me.
Let investors voluntarily bail them out.
Better than forcing us taxpayers to do it involuntarily.
Is it worth for a young investor like me to buy shares in freddie mac for long term?
Naah forget buying stock in Freddie, go buy Real Estate in Las Vegas, San Diego or Phoenix. For one you can leverage yourself almost 100%, whereas in stock they like you to put up 50% of your own cash.
That’s old fashioned.
Seriously it’s your money, but if you gave me cash to play with I wouldn’t touch one of the GSEs with a 10 foot pole.
Ordinarily, I don’t give specific investment advice in any discussion group.
In this case, however, the perils are so large that I’m going to give you specific advice and the reasons why.
The advice: “No, absolutely not!”
Now why:
The GSE’s have huge issues that prevent you, the individual investor, from making informed decisions about your investment.
1. They’re not run by competent management. Instead, it seems as tho the only people to be put into high-level management positions in the GSE’s are well connected political hacks, usually Democrats.
2. Their books are atrocious. As an investor, you aren’t able to find out just what they’re doing, because the books are cooked.
Don’t believe me. Believe the Office of Federal Housing Enterprise Oversight (OFHEO):
http://www.ofheo.gov/media/pdf/fnmserelease.pdf
See that little nugget in there how Fannie tried to use their connections with Congress to get the investigators ears boxed? That’s always a first-class sign to not give your money to these criminals.
3. The Congress, in their rush to make it look as tho they were “doing something,” increased the “conforming loan limits” of the loans that Fannie/Freddie could buy on a county-by-county basis. For the vast majority of mortgages in the US, a conforming loan is $417,000, no more.
For many counties in California (for example), the conforming loan limit goes as high as $729,750. This is absurdly high, and this “conforming jumbo” loan limit is applied to the counties with the most highly inflated real estate valuations.
Well, the broker or bank that wants to write a mortgage that used to be Alt-A (jumbo) can now write it up as “conforming jumbo” and fob it off on Fannie. What a deal!
Many properties in the areas that have their conforming limits set much higher than the nominal $417K will see their prices depreciate further - ie, by Fannie buying loans written against these “conforming jumbo” limits, they’re opening themselves to more, not less, default risk.
4. In “the long term,” the absurdly high leverage employed by Fannie is unsustainable. They have to de-lever their loan portfolio, and that’s what this attempt to raise capital is all about. Well, many of the banks that have gone out to raise more capital since this “sub-prime” market crisis started have had to go out for more than one round of new stock issuance. There is a very real possibility that Fannie will be issuing yet more stock after this round, which would be dilutive to the current equity holders.
5. One of the plans being proposed/floated in DC to “rescue” Fannie/Freddie has the government (the Treasury) buying the common, and turning Fannie/Freddie into a socialized agency. Another plan (Bill Ackerman’s plan) has Fannie/Freddie simply writing off the common stock and junior debt, and telling the senior debt holders that they have to take a haircut on their bonds.
Either way, things don’t look at all good for holders of the common equity going forward in either of these plans.
6. Let’s put all the issues above aside: from here on, the business model of Fannie (and Freddie) are going to change. The Congress, the Treasury and the Fed have now seen that the predictions of serious problems within Fannie/Freddie are coming true and if they want to keep these GSE’s in business, they have to change how they’re run. Problem is, the Democrats love using these GSE’s as patronage. So while the Fed, the Treasury, et al, might want new regulations and oversight into Fannie/Freddie, the Democrats are going to want things to stay largely the same. So you really have no good idea what corporate governance will look like going forward.
7. They’re probably going to have to chop their dividend to preserve capital.
All of this adds up to “Stay away. Stay very far away.”
BTW — where I said “Fannie” — just use a “Fannie/Freddie” combination. They’re both in largely the same boat - the numbers differ in small ways, but other than the exact details of their books, the problems are the same at both GSE’s.
I just saw this headline at wp. ‘Freddie to sell billions in stock.’ They’re asking SEC for permission.
Now...
I just have to ask. What kind of people will be buying such stock?
Union and government pension funds, after a little arm twisting.
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