No worries, so far, for Fannie and Freddie debt holders; it’s another story entirely for their battered shareholders
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The government’s rescue plan for mortgage giants Fannie Mae and Freddie Mac, announced by Treasury Secretary Henry M. Paulson Jr. on Sunday, sparked a brief rally in the stocks early today. Very brief.
The shares bounced up at the opening of trading but couldn’t hold their gains. Both ended down for the session, at new 17-year lows. Fannie Mae rose as high as $13.50, then closed off 52 cents, or 5.1%, at $9.73. Freddie Mac rose to $9.80, then ended down 64 cents, or 8.3%, at $7.11.
The stocks are down more than 75% year to date, but today’s action suggested the bottom still may not be in sight.
Yet investors had no fear of buying three- and six-month debt securities from Freddie Mac today. The company sold $3 billion of the bills, and the offering attracted a larger-than-usual number of bids.
In an otherwise frazzled market, investors’ split views of the companies’ stocks and their debt instruments actually make sense. Wall Street has no real doubt that Uncle Sam will back the debt, if that’s what it comes to. We’re talking trillions of dollars’ worth of the company’s bonds in the hands of investors worldwide, including foreign central banks.
If anything is ‘too big to fail,’ it’s the debt side of Fannie and Freddie. That’s good news for popular bond mutual funds like Pimco Total Return, which owns heaps of Fannie and Freddie bonds. Pimco Total Return’s shares edged up 4 cents to $10.68 today.
As for the companies’ equity investors, however: After an initial burst of optimism today, ‘I think they realized that there is a distinction between saving Fannie and Freddie and bailing out the shareholders,’ said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
If the Treasury ends up buying equity stakes in the companies to bolster their capital, current shareholders will be left with little or nothing.
It wasn’t just the common shares of the companies that fell further today. So did many of their preferred issues -- stocks that pay high dividends and are ahead of the common shares in any claim on the companies’ assets. Presumably they fell on the assumption that any government stake in the companies also would be senior to existing preferred shares.
It’s the least the Treasury could do for taxpayers if an equity bailout becomes inevitable.