No worries, so far, for Fannie and Freddie debt holders; it's another story entirely for their battered shareholders

The government’s rescue plan for mortgage giants Fannie Mae and Freddie Mac, announced by Treasury Secretary Henry M. Paulson Jr. on Sunday, sparked a brief rally in the stocks early today. Very brief.

The shares bounced up at the opening of trading but couldn’t hold their gains. Both ended down for the session, at new 17-year lows. Fannie Mae rose as high as $13.50, then closed off 52 cents, or 5.1%, at $9.73. Freddie Mac rose to $9.80, then ended down 64 cents, or 8.3%, at $7.11.

The stocks are down more than 75% year to date, but today's action suggested the bottom still may not be in sight.

Yet investors had no fear of buying three- and six-month debt securities from Freddie Mac today. The company sold $3 billion of the bills, and the offering attracted a larger-than-usual number of bids.

In an otherwise frazzled market, investors’ split views of the companies’ stocks and their debt instruments actually make sense. Wall Street has no real doubt that Uncle Sam will back the debt, if that’s what it comes to. We’re talking trillions of dollars' worth of the company’s bonds in the hands of investors worldwide, including foreign central banks.

If anything is "too big to fail," it’s the debt side of Fannie and Freddie. That's good news for popular bond mutual funds like Pimco Total Return, which owns heaps of Fannie and Freddie bonds. Pimco Total Return's shares edged up 4 cents to $10.68 today.

As for the companies’ equity investors, however: After an initial burst of optimism today, "I think they realized that there is a distinction between saving Fannie and Freddie and bailing out the shareholders," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

If the Treasury ends up buying equity stakes in the companies to bolster their capital, current shareholders will be left with little or nothing.

It wasn’t just the common shares of the companies that fell further today. So did many of their preferred issues -- stocks that pay high dividends and are ahead of the common shares in any claim on the companies’ assets. Presumably they fell on the assumption that any government stake in the companies also would be senior to existing preferred shares.

It’s the least the Treasury could do for taxpayers if an equity bailout becomes inevitable.

Photo: Treasury Secretary Henry M. Paulson Jr.

Comments

[Concernned]

The Hidden Crises on Oil

The real story is the one not being reported. Bush is intervening in the row between Russia and Georgia, giving the Georgian nut job of a dictator an implicit US backing. Georgia sits on the Azerbajani pipeline from Baku to Cyphon and the region in general also holds 3 Russian major gas and oil pipelines. Now Bush has put not only Iran and thus the Straights of Harmouz under the gun but also the Caucuses, over all some 40% of the World's oil and gas are now under threat of war. Factor that into the cost of oil and gas and we should be seeing prices in and around $170 per barrel!

[Lasha zilpimiani]

as AI understood my friend, you've got no idea of what's really going on in Eastern Europe, Caucasus. there is no dictatorship in Georgia, and the fact that we are helping them to get rid of a brutal russian aggression sounds goot to me! I went in there 4 times and remained astonished by their progress done in last 10 years. Georgia is a democratic country that has higher democratic achievments then many western european countries in the EU. the only reason Georgia in not a member of E.U. and NATO yet, it's our spineless and weak western european allies who are frightened to death by Moscow. Helping Georgia combating Russian Corrupted and autocratic government's attempts to back it separatist region's will significantly improve at least a part of oil supplies and their security.

[martscan]

Am I missing something...are the two preceding comments pertinent to the topic?

On the topic, why not cash out the existing stakeholders with a fair price, i.e., nothing, stop the charade and nationalize Freddie and Fannie? Government instituted and operated the HOLC successfully in the 1930s...and, if done right, could be repeated with Frick & Frack and eventually returned to private ownership. Granted, there would be a great hue and cry about free market infringement, socialism, threats to capitalism, etc...but learned people know that FDR's so-called radical, leftist programs served to save capitalism as much as they did to give the basic factor of production, a man, a job.