Bailout or Bustout? Fannie and Freddie
Posted
Sep 05 2008, 05:41 PM
by
Andrew Horowitz
Rating:
5:45 on a Friday night. Somehow I knew something was in the air. The end of day upward move for a market that should have traded lower made no sense. It appears that now, according to the WSJ, there is talk about a backstop for Fannie and Freddie. It is a general consensus that any plan will have a very negative impact on the common shares and after hours shares are sinking. Freddie is now down 23% for the day and Fannie is down 20%. Wait, Freddie is down 25%, no 27%, uh......this is not pretty and I am not kidding.
Somehow, there is talk of a rally that will be in place as the market opens on Monday. Perhaps that is good news as I suppose that the guessing game is coming to an end and investors will be able to rest with the knowledge that we finally have a big fat failure, once and for all.
Of course, the good news is a matter of perspective; I can't imagine it is good if you have anything to do with either of these companies. (both leveling off down 24% now...oh...spoke too soon, Fannie dropping again, down 31%)
A government plan will certainly take some heat off of the financials for the moment and if the Fed/Treasury actually plan on taking over these mortgage monsters, the problem will then rest squarely on yours and my shoulders. We will pay for the lasting luxury of ensuring the survival of both companies through higher taxes and reduced benefits. Nice!
(By the way, both are only off by 19%...)
From the WSJ:
Precise details of Treasury's plan couldn't be
learned. The plan is expected to involve a creative use of Treasury's
new authority to make a capital injection into the beleaguered giants.
The plan includes changes to senior management at both companies, according to a person familiar with the plans.
An announcement could come as early as this weekend.
On Friday, a series of high-level meetings were
planned between Federal Reserve Chairman Ben Bernanke, Treasury
Secretary Henry Paulson, the chief executives of Fannie Mae and Freddie
Mac and the companies' new regulator, the Federal Housing Finance
Agency.
Treasury has been working with
bankers at Morgan Stanley to use its newfound authority, granted by
Congress in July, to devise a way to prop up the mortgage giants, which
have been pummeled by investors in recent weeks.
The two giants are vital cogs in the U.S. housing
market and their financial woes have threatened to worsen the bursting
of the housing bubble.
"We are making progress on our work," said Treasury
spokeswoman Jennifer Zuccarelli. She declined to comment further on
Treasury's plans.
Related Reading:
Disclosure: Horowitz & Company managed account clients do not hold positions in securities mentioned as of the publish date.
Andrew Horowitz is a money manager and the founder of Horowitz & Company. He is also the author of the bestselling book, The Disciplined Investor . Check out his latest investment idea or listen in as he hosts, The Disciplined Investor Podcast.
