FANNIE & FREDDIE BAILOUT

august update:

I am getting calls and emails about the nosedive in stock prices of Fannie and Freddie. At a funeral of all places this weekend an elderly gentleman told me about the "great Preferred Fannie Mae stocks paying 11% my broker sold me"!!!

My opinion: de facto and de jure, these quasi agencies are bankrupt. Those smart enoough to have bougt quality Ginnie, Freddie, and Fannie Certified Mortgage Obligations instead of commercial mortgages, subprimes, aution notes, common and preferred stock etc will be fine. Those who kept holding and buying Fannie and Freddie stock will get zero.

I would hope that the Fed and Treasury simply "rolls up" Fannie and Freddie and places them under GNMA (Ginnie Mae) administratorship. Better yet, the much smaller but savvy Veterans Administration (VA) mortgage loan division could be given new powers and expanded as a trustee. As they have for years they could charge 50 basis points (1/2 of 1 per cent) for administrative and origination fees and smoothly transition Fannie and Freddie portfolios.

Most likely though is a true government bailout in which Fannie Mae and Freddie Mac keep their names and their entities but become a fully direct-insured arm of the federal government. This will allow them to keep their pretty campuses, padded expense accounts, lobbying funds, and waste.

A client who is a car dealer called and asked, "How could I see the stock of Fannie Mae and Freddie Mac falling every single day, but my Fannie and Freddie mortgage bonds that I own keep going up in value. I am a non sophisticated guy...make it simple for me."

I told him like AMTRACK and the US Postal Service there are certain hybrid entities which are run like private corporate boards but are under the umbrella of the government. As a car dealer, well, let's say you bought FIVE new Ford Escapes today--one for you and your wife and each kid. At Christmas time you see Ford has declared bankruptcy--closing plants, more layoffs, looking for a buyer, etc. "Do you think you will have trouble getting a windshield wiper blade, spark plug, or battery for your Ford next year?"

He answered "No" and explained the years and years of replacements parts in storage, the after market manufacturers, and how his car has nothing to do with the management problems at Ford. Bingo! Only the common shareholders have a problem...

For the oldtimer who thought he was getting a great deal with Fannie preferred stock. Well, yes he was right when he told me that "I get paid before those common shareholders." What he didn't realize, until I told him, is that when Fannie goes bust, the employees, secured creditors, and corporate bondholders will try to get paid before he does which is likely to leave him with nothing.

As for the current Freddie and Fannie claims they they are flush with cash, and have reserves, and lots of money for expenses. My response is that every airline is flush with cash after a 747 completely filled with passengers from New York to Los Angeles takes off. They are flush with cash until they have to re-fill the gas tanks.---m.s.

WITH FANNIE AND FREDDIE trading at 18 year lows I predict the Treasury Dept will fold up the govt mtg tent into a bail out called a "consolidation"....perhaps "combination" under the quasi governmental umbrella of GINNIE MAE...

FOR 25 YEARS I HAVE TOLD CLIENTS their government agency bonds are indirectly backed by the full faith and credit of the government, and if individual bonds default the reason we use the agency paper instead of commercial paper is because our "insurance" is for "timely payment of principal and interest.Z"

The test of that thesis has now come.

In a sad, perverse, but perhaps silver-lining kind of way all of this is kind of long term good news. Sort of a cleansing of the system....

No matter what your politics, when Iraq invaded Kuwait and the U.S. built a swift and firm coalition to smack them down, it reaffirmed that treaties and commitments sometimes really mean something in the world. If the Fed and Treasury put the tourniquet on Freddie and Fannie in the wake of the sub-prime scandal (notice I call it scandal and not just crisis), and rush the patient to the E.R. the billions spent to save TRILLIONS in assets are the cost needed to allow the patient to survive and live to work and love another day.

I continue to believe for those investors with a 10-plus year retirement horizon these are generational equity buying opportunities. For those retiring in five years there is room for selective buying. For those retired or retiring in the next year, make sure that your portfolio has dividend paying transnational large cap stocks so that your reinvestments are buying more and more and more quality companies at discount prices. The bankers and mortgage brokers had their turn to be greedy....now it is yor turn to be greedy by hoarding great names at great prices.

Mark Scheinbaum, mng dir

LF-Financial