These two massive GSE’s staged for a monumental meltdown are sucking the air out of the proverbial (mortgage market news) room. Lots of good coverage and analysis:
Associated Press: Fannie Mae, Freddie Mac shares plummet
Shares of mortgage finance companies Fannie Mae and Freddie Mac continued their plunge Wednesday as investors are increasingly convinced that the stocks will drop to zero if the government bails out the troubled companies.
Marketwatch.com: Freddie, Fannie tumble in early Wednesday
Freddie was the worst hit, as its shares dropped over 20% at the open reaching a low of $3.15. Fannie was down 17% to $5 at the open The stocks of the two mortgage giants have been badly hit this past week amid increasing fears that the government would bail them out, wiping out existing shareholders.
NYTimes.com: Some Say Bailout of Housing Giants Is Inevitable
“The markets are acting like a bailout is inevitable,” said Sean Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. Mr. Egan said he believed the federal government would need to help pump about $20 billion into each company, possibly through a government guarantee rather than through a direct injection of capital.
“We believe Treasury is going to be forced to act within the next couple of weeks,” he added. “Probably some time after Labor Day, when investors are back from vacations so that the bailout has the biggest possible positive impact.”
Scotsman.com: Between the lines: Bush faces dilemma over fate of Fannie and Freddie
In a bid to help, in mid July, Congress approved a rescue package that empowers the Bush administration to inject billions of federal dollars into the companies. In effect, renationalise them and plug the hole in the balance sheet with massive amounts of taxpayers’ cash. However, this was actually all smoke and mirrors. Bush does not want to take over Fannie and Freddie.
NakedCapitalism.com: Freddie, Fannie Nail-Biting Continues
I suppose the Bushies thought they could kick this can down the road to the next Administration, but that isn’t going to succeed. A five-year Freddie note sale got done at record high spreads over Treasuries. And before you say, “Well, it got done,” one of the rules of Wall Street is almost everything can be solved by price. Illiquidity is often tantamount to “the seller can’t stand the bid,” as opposed to a complete absence of buyers (although there are market free falls when there are no bids or gross order imbalances).
Mish’s GETA: Fannie, Freddie $223 Billion Debt Rollover Problem
$233 Billion is a an enormous amount of debt to have roll over between now and September 30, especially in this market. And there is a decent chance the bond market chokes on those rollovers. That is one reason why Paulson asked for a blank check to buy unlimited amounts of Fannie and Freddie bonds.
If the Fed does step in to bankroll those bonds, it may want “super-senior rights”. Fear of that possibility is pushing those spreads to record levels. Paulson’s resolve to not use the authority he asked for is very likely to be put to the test.
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