Hey muldoon

[peternap]

Financial s aren't my field. What do you think the chances of Fannie Mae recovering in the next year? I doubt there will be a better entry point since the Hedge Funds got their hands slapped. If they even recovered half of their 52 week high, there would be a 30,000.00 profit on a 7,000. investment.

[muldoon]

I know.  man I know.  I keep looking at it too. 

Conventional wisdom says the shareholders would be wiped out, and the stock should be delisted.  The USG would step in, nationalize the agencies to make bond holders whole and preserve the financiers.  Paulson & Bernanke do not want the resulting firestorm that would erupt by defaulting on the responsibilities of the gses.  It would take the mortgage industry out of the US and put everyone buying houses with checks and payday loans. 

Once again, the problem is leverage (and the arrogance that came with it).  They ran a 60:1 some say more (Ackerman said 140:1 this morning) so the smallest loss in equity wipes out huge sums of very real capital.  As a stock, I think it's a short to zero.  For senior debt, I say they will get some - maybe even all their funds out. 

Herein lies the trouble as I see it.  They attempted to borrow money on friday and were unable to find funding.  This caused them not to roll over a relatively small amount of float.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4327506.ece

"The sweeping measures to restore confidence in Fannie and Freddie — and the housing market in general — came ahead of a critical attempt by Freddie to borrow $3 billion from Wall Street today. The Government worked furiously behind the scenes over the weekend to ensure that Freddie Mac is able to sell the $3 billion of short-term debt in the group in a "Dutch auction" today — and at an acceptable interest rate. Treasury officials took the highly unusual step of calling leading banks and urging them to buy Freddie's debt."

Now, we have the US stepping in to fix it, they did arrange the Freddy Auction on Monday.  It went off well selling 3b in bonds.  Their 3 month note went at 2.309% some 70bips over the IRX (13 week treasury).  Sounds to me like the bond world is not placing much risk premium on them at all.  Tells me the bondholders have implicit or explicit faith in the USG. 

With BSC, those who bought at 2 got to see it go to 10, where it sits today.  That's the part that worries me as conventional wisdom said they were short to zero also.  Still are in my opinion. 

[desdawg]

The four pages of comments at the bottom of muldoons article link are pretty interesting. Here is one for you:

Mark my words, the world has yet to see anger and dispair from "the beast", like the world has never witnessed.

and another:

This surely shows what a dire state the US economy is in if the Treasury are begging banks to throw good money after bad. Wonder how long they can keep it up?


I think I would stay far away from Fannie & Freddie.

[desdawg]

It has been an exciting event filled few days. I suppose we can get back to fretting over the price at the pump now. http://news.yahoo.com/s/nm/20080716/bs_nm/markets_oil_dc_10
Despite the announcements of loosening the drilling policies that fix is years away from being a reality we can see. But every journey starts with a single step. BP said they need 10 years to develop the right drilling technology for that application. By that time we should all be driving golf carts.
One thing that has become clear to me as a result of the sub-prime mortgage fiasco is that if an industry doesn't police itself Big Brother will step in and nationalize the industry. My hope would be that the oil industry will recognize that fact as well. Those off the chart profits at the consumers expense seem to lead down that road.

[muldoon]

So, it's been a month since we talked about this.  FNM and FRE did bounce, if you did wind up playing it you may have made some nice coin.  If your still holding, not so much. 

From Barrons this morning, essentially what I said a month ago. 
http://online.barrons.com/article/SB121884860106946277.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_right
"Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses."

From the latest debt sale today, FRE is seeing 330 basis points on new debt.  This is half a point higher than Friday. 
http://www.smartmoney.com/news/ON/index.cfm?story=ON-20080818-000444-1512&

As income decreases (and owning half the mortgage market in the US when the value of the assets decrease >than 10% is a huge decrease), selling a product that no one wants (securitization of paper), and your costs are soaring (increased debt costs), all the while your exposure is in the trillions and your current capital is tens of billions.  There's a reason both have pegged new 52 week lows today... err make that 18 year lows.

I still think they both go to zero. 

[peternap]

Yep, I did get in...and got out. I didn't sell at the peak and I rarely do. I've never been able to figure absolute high or low.

I did make a healthy profit.

I have a makeup stock that I think will do well. I sold for a 2.25 profit because it made the reg show list. I'll buy back in when they drive it down.

It's at 13 now and should make 20 within a year (Famous last words)