Posted by Kenneth Anderson:
Can Anyone Explain Freddie and Fannie to Me These Days?
http://volokh.com/archives/archive_2009_08_23-2009_08_29.shtml#1251217800
The Washington Post's Zachary Goldfarb notes in a story today that
F[1]annie and Freddie shares - yes, despite being in conservatorship
(receivership by any other name) by the US government -the common
stock still trades, although the New York Stock Exchange has
threatened to de-list - have surged in active trading in the past few
months. (The story has a couple of good graphs.)
On Monday, Fannie Mae jumped 41.7 percent, to $1.70 per share, with
nearly 824 million shares bought or sold during regular trading
hours. Freddie Mac rose 18.5 percent, to $2.05 per share, with
almost 384 million shares trading hands. Activity in the two
companies' stocks accounted for nearly a fifth of trading on the
New York Stock Exchange on Monday, when 6.3 billion shares were
bought and sold.
This presents something of a question, given the economic fundamentals
of the two companies. In terms of the fundamentals of each company,
well, Freddie has announced it won't need a new round of government
financing (but I have questions still about the longer run); Fannie
sought billions more. In terms of the ability of common shareholders
to access any improvements in the company, well, they stand a long way
behind other parties, starting with the USG; don't hold your breath.
As Goldfarb says,
The government took a nearly 80 percent stake in each company, but
left the stock outstanding. The shares of each settled below $1,
and the New York Stock Exchange warned the firms that they'd be
removed from the exchange if their stock did not rise above that
threshold.
In recent months the firms' shares have risen steadily with the
overall market. There have been occasional pieces of good news. For
instance, Freddie Mac said earlier this month that it does not need
more government aid for now, after receiving $50 billion since
November.
Still, most analysts say that because the companies owe the
government far more than they are able to generate in profits, the
real value of the shares is zero.
So why the rush to buy? The obvious explanations are: (1) the
investors know something the rest of the world, including the experts,
don't know, (2) irrational noise trading, mostly by retail investors
and day traders playing with trends, or (3) risky but necessarily in
all circumstances irrational bet on the political economy of the GSEs
rather than their economic fundamentals.
The last two, particularly, are not inconsistent with each other.
Moreover, what constitutes efficient processing of information means
something different in markets that are driven by politics and
political considerations than otherwise; rather than focusing on the
quality of the underlying portfolio, one concentrates upon the Mind of
Barney Frank, which requires a different sort of inputs altogether.
But Goldfarb has been writing excellent coverage of the big picture
questions of the future of Fannie and Freddie as well. They were
conspicuously not discussed in the recent Treasury White Paper on
financial reform - but then Goldfarb noted a flurry of inside comments
on what might happen, rumors later denied by the administration. It
does not appear that a final resolution of them will be proposed
before the beginning of 2010. And yet, in the meantime, Ginnie Mae has
picked up much of the slack, along with slack underwriting standards
for mortgages to rival those of the meltdown, and Fannie and Freddie
are still being used to prop up the market. It matters hugely to the
shape of the mortgage and securitization markets what the long term
roles, if any, of Fannie and Freddie will be.
The general possibilities, in any case, are what they have always been
- (1) fully privatize; (2) fully convert to being a full government
agency (again); or (3) the mixed GSE format that Fannie and Freddie
have now. (There is a further question, on any of those scenarios, as
to where their portfolios, meaning the toxic parts, winds up.) The
answer can't wait forever insofar as it is a core component to getting
securitization markets moving at a more efficient level; perhaps the
worst result is no real policy except by default, in which no true
decision is made with a restructuring of regulation, but just ad hoc
drifting, using the convenience of the GSEs for short term government
policy and/or Congressional political desires, and building up new
long term risks.
References
1.
http://www.washingtonpost.com/wp-dyn/content/article/2009/08/24/AR2009082402766.html
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