Fannie, Freddie Take Another Beating

A story appearing in Barron’s — which, it should be noted, didn’t exactly say anything really new — managed to ignite the latest round of selling by equity investors in shares of Fannie Mae (FNM) and Freddie Mac (FRE) on Monday. The story cited unnamed “government officials” as saying they “don’t expect the agencies to succeed” at raising any capital needed in the future to offset rising credit costs, which was enough to send both companies into their latest freefall. Freddie closed at $4.39, down 25 percent on the day; Fannie fared little better, closing at $6.15 and off 22.25 percent. Read the full Barron’s story here. All of which put the GSEs on the same path they were on when the New York Times suggested weeks ago that government officials were weighing conservatorship for one or both entities. “The Barron’s article overstated Freddie Mac’s financial situation,” Sharon McHale, a Freddie Mac spokeswoman, told Reuters. “We continue to be adequately capitalized.” Officials at the Treasury and Fannie Mae did not comment on Monday’s market movement or speculation by Barron’s. But it wasn’t just equity investors reacting to the newest round of fear on Monday; according to Reuters, citing an unknown dealer, spreads on Freddie Mac 10-year subordinated debt widened over Treasury notes to a bid of 370 basis points and offer of 325 basis points, up sharply from a close of 285 basis points on Friday. The movement in credit default swaps left some of HW’s sources flabbergasted. “The government has already said they’re backing the GSEs,” said one source, an ABS analyst that asked not to be named. “Cooler heads will eventually rule the day, but today clearly isn’t that day.” The Barron’s article reserved its harshest judgment for Freddie Mac, saying that the GSE “failed” to raise capital in May after reporting Q1 earnings and suggesting that Bush officials were “shocked” at the company’s decision to wait. “Syron said when second-quarter earnings were released Aug. 6 that the company was waiting for a more ‘propitious’ time,” according to the Barron’s story. “One might argue it came in May, when the stock was 25, not 6.” The Barron’s article also trudged up well-worn arguments about accounting treatments used to estimate core capital at the GSEs, echoing the same argument made in early July by former St. Louis Federal Reserve president William Poole, who called the GSEs “insolvent.” Poole’s remarks were at the time characterized as “patently stupid analysis” by a team of analysts led by Jim Vogel at FTN Financial. Vogel has suggested that Freddie Mac could go at least four more quarters without needing outside capital, even with mounting losses; and whether additional capital would be needed at that time would be a function of market conditions. That said, the GSEs are not without their problems; problems that may yet prove to be their undoing, if investors fleeing equity positions doesn’t do the trick first. Read HW’s coverage of Alt-A exposure at Fannie Mae here. The dire outlook from Barron’s did, however, make Treasuries shine brightly for investors: Ten-year Treasury note yields fell 3 basis points to $3.815 percent, while two-year note yields dropped 7 basis points to 2.321 percent, MarketWatch reported. Disclosure: The author was long FRE when story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.