Now I wonder if the markets knew this was coming and have already compensated for it, or will we see a nasty crash this week.
It was reported that the news was to be before the Asian markets open, so watch those today as an indicator of the US market reaction.
The markets have known something like this was possible for quite some time now.
This doesn’t totally wipe out common stock holders. When the takeover was announced (w/o details) Fri afternoon, Fannie and Freddie stock took a sizeable hit in after hours trading. This bailout effectively gives the gov’t an option on about 80% of the two companies. This is bad for shareholders, but not as bad as it could have been and probably not too far out of line with what the market was expecting.
Many of the bank and homebuilder stocks went up in Friday’s afterhours; probably because the gov’t moving to back Fannie and Freddie debt takes that uncertainty away and does help get credit flowing again.
Trading in FNM and FRE will be fast and furious tomorrow, but I think this has largely been priced in by the rest of the market. At this point, FNM or FRE common stock is basically a lottery ticket.
In a perfect world, the first source of capital that should be required is a return of every nickel of campaign or political event contributions ever made by FNM & FRE to candidates or the two political parties. I know, never happen - but we can dream.
I don’t know how the markets could predict anything without knowing the details of the bailout — who gets repaid and who’s shares go to zero. I think everyone assumed that the preferred shares would get repaid, but without knowing the details of the bailout, there was a lot of guessing if buying Fannie and Freddie last week was worth it or not. Shares jumped up in value last week, so somebody was guessing that their common shares would be bailed out. I guess we’ll see...