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Fnm Fre
- Thread starter Daal
- Start date
Quote from piezoe:
My gut feeling is that this will not be the case but rather the common share holders while losing a good bit if they bought and held, will, in the end, be at least partially bailed out by US tax payers. Frankly I take no stock in Barron's prognostications whatsoever, as of late it seems they have been used to manipulate and have little credibility in my mind. (Consider, as just one example, their truly idiotic, recent, front-page call on GM.) Think about the mutual funds and institutions that own fanny and freddy and i think it will be clear that these guys will be rescued in some form or other at, of course, the tax payers expense. All Treasury has to do is let the word on the action to be taken "leak" to favored funds and institutions ahead of the public, and they can position themselves appropriately to take advantage. I just don't see current equity being permanently wiped out as Barron's has predicted "may" happen. But, to be sure, it is a bad situation no matter what, and underscores the ultimate depth of the recession we are entering.
It will be quite a few years before the real estate/banking/building sectors recover! (Thank you Mr. Greenspan!)
This is actually a pretty tough call for the treasury, I am interested to see what they do but wouldn't want to be in their shoes. It looks like two bad choices.
If they had to liquidate now at the current market values there would obviously be nothing left for the shareholders, but in their old deal that doesn't matter- they can stay in business unless regulatory capital went too low or they missed a debt payment. Their capital is (or at least was) measured with a formula agreed upon by their regulators that doesn't mark to market, and I am pretty sure they still have enough by this definition. They can still make debt payments as long as the market keeps letting them refinance their short term debt. And they are so leveraged that it wouldn't take a huge move in market values for mortgages to put them back in the black on an economic/fair value basis, and this is not at all out of the question if they are allowed to hang on a little longer. So if they are shut down too soon and shareholders are wiped out they have a right to be pissed.
But from a policy point of view, management is now in a position where they have a huge incentive to ramp up the risk, and it is pretty much in the shareholder's interest for them to do so. They are like guys in a casino with one chip left, why not put it on the roulette table? So the longer they are allowed to hang on the bigger the worst case bill to the taxpayers gets.
I agree with this analysis. The gov't cannot afford to let FNM/FRE to completely fail because of the additional economic damage it will cause but if they pull the plug before they get to that point then they can't give the shareholders nothing since the shareholders will rightly claim that the gov't action was premature (e.g. they were solvent when they were taken over)Quote from black diamond:
This is actually a pretty tough call for the treasury, I am interested to see what they do but wouldn't want to be in their shoes. It looks like two bad choices.
If they had to liquidate now at the current market values there would obviously be nothing left for the shareholders, but in their old deal that doesn't matter- they can stay in business unless regulatory capital went too low or they missed a debt payment. Their capital is (or at least was) measured with a formula agreed upon by their regulators that doesn't mark to market, and I am pretty sure they still have enough by this definition. They can still make debt payments as long as the market keeps letting them refinance their short term debt. And they are so leveraged that it wouldn't take a huge move in market values for mortgages to put them back in the black on an economic/fair value basis, and this is not at all out of the question if they are allowed to hang on a little longer. So if they are shut down too soon and shareholders are wiped out they have a right to be pissed.
But from a policy point of view, management is now in a position where they have a huge incentive to ramp up the risk, and it is pretty much in the shareholder's interest for them to do so. They are like guys in a casino with one chip left, why not put it on the roulette table? So the longer they are allowed to hang on the bigger the worst case bill to the taxpayers gets.
At these price levels its a pretty low risk bet to go long on either; I don't see the shareholders ending up with zilch, especially coming on the heels of the BSC precedent.
I partially agree with your analysis - if shareholders get zero then they can complain that the government intervened while they were solvent.
The simple solution to this is to do a capital raising that is substantially dilutive (eg. $10b plus of preferred).
In that situation, the common equity may still have some value, but that value may be measured in cents rather than dollars - particularly for FRE.
The simple solution to this is to do a capital raising that is substantially dilutive (eg. $10b plus of preferred).
In that situation, the common equity may still have some value, but that value may be measured in cents rather than dollars - particularly for FRE.
Quote from GTS:
I agree with this analysis. The gov't cannot afford to let FNM/FRE to completely fail because of the additional economic damage it will cause but if they pull the plug before they get to that point then they can't give the shareholders nothing since the shareh4olders will rightly claim that the gov't action was premature (e.g. they were solvent when they were taken over)
At these price levels its a pretty low risk bet to go long on either; I don't see the shareholders ending up with zilch, especially coming on the heels of the BSC precedent.
Quote from m22au:
I partially agree with your analysis - if shareholders get zero then they can complain that the government intervened while they were solvent.
The simple solution to this is to do a capital raising that is substantially dilutive (eg. $10b plus of preferred).
In that situation, the common equity may still have some value, but that value may be measured in cents rather than dollars - particularly for FRE.
Another point to consider is that if the govt really wants to force a bailout, they can just make a verbal statement that FNM/FRE have no government backing for the debt. The stock will immediately be worthless and the companies won't be able to refinance. The govt can then take over both entities on the terms of their choosing.
Ideally they should pay cents on the dollar to bondholders, so that PimpHo and other crony "capitalist" sharks don't get to feed on the carcass of Joe Taxpayer. But let's be realistic, this is the most economically socialist administration since Nixon and there's no way they are going to put the interests of voters ahead of a bunch of faceless financial institutions, foreign corporations and SWFs.
Cutten - interested in your thoughts - how do you think the bailout will be structured?
Quote from Cutten:
Ideally they should pay cents on the dollar to bondholders, so that PimpHo and other crony "capitalist" sharks don't get to feed on the carcass of Joe Taxpayer. But let's be realistic, this is the most economically socialist administration since Nixon and there's no way they are going to put the interests of voters ahead of a bunch of faceless financial institutions, foreign corporations and SWFs.
Another point of view:
http://www.clusterstock.com/2008/8/fannie-fnm-freddie-fre-countdown-to-zero
http://www.clusterstock.com/2008/8/fannie-fnm-freddie-fre-countdown-to-zero
Most analysts speculate that the bailout will take one of two forms:
* Investment in preferred equity, which would wipe out current shareholders.
* Purchase of debt, with some of Fannie and Freddie's mortage portfolios pledged as collateral.
Those who are still buying FNM and FRE's stocks at this level are presumably banking on the second scenario. They shouldn't: It will likely just delay the inevitable. Buying debt would provide liquidity, but it wouldn't solve the credit problem. And, eventually, unless the economy and housing markets suddenly recover, future losses would likely force the companies to raise equity. Which returns us to bailout option No. 1.
Barring a miracle, FNM and FRE are going to zero. It will be interesting to see how long it takes the market to reflect that
Quote from GTS:
Another point of view:
http://www.clusterstock.com/2008/8/fannie-fnm-freddie-fre-countdown-to-zero
stock almost certainly wont to go $0.00, meaning it wont be worthless(because they wont file for bankrupcty)
-shareholders can sue the government and get some kind of recovery
-if the treasury tries an acquisition bill miller and other managers will try to vote the deal down(claming the regulators,bernanke, paulson recently said they were solvent)
-if its preferred, there is still 'hope' that the stock one day will be worth something when housing recovers and the government is repaid. equity is supposed to be worth the cashflow you can take out over 50-100 years