Speculators poured into shares of Fannie Mae and Freddie Mac on Monday, the first day of trading after the Obama administration in effect gave the companies blank checks of federal support.
But exactly how the government’s move makes a payoff for Fannie and Freddie shareholders more likely in the long run, rather than less likely, ought to puzzle most investors.
The stock market’s reaction mystifies veteran banking analyst Bert Ely at Ely & Co. in Alexandria, Va.
“They’re not going to get anything back,” he says of any investors who have long-term faith in the mortgage giants’ shares.
Of course, “long term” for most people trading these two stocks probably means an hour or so.
Freddie’s shares jumped 34 cents, or 27%, to $1.60; Fannie’s stock gained 22 cents, or 21%, to $1.27. Trading volume for both was the highest since late October.
The day’s action was reminiscent of the speculative frenzy that erupted late last summer, when shares of Freddie Mac and Fannie Mae nearly quadrupled from the end of July to Aug. 28. During that four-week period, Freddie’s stock rocketed from 62 cents to $2.40, while Fannie’s shares soared from 58 cents to $2.04.
The Treasury on Christmas Eve announced that it was removing previously set limits on federal financial aid for the companies, which were seized by the U.S. in September 2008 amid mounting mortgage losses. The restrictions had capped aid at $200 billion for each firm. Freddie so far has tapped $51 billion and Fannie has used $60 billion.
The administration said it was removing the caps to “leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.”
But whatever additional federal money flows into Fannie and Freddie would almost certainly come at the expense of shareholders’ remaining stake. The government now owns 80% of both firms.
The administration is supposed to announce its long-term strategy for Fannie and Freddie in February. The companies’ losses could continue to balloon if, as some analysts expect, the White House were to seek to use the companies to support new mortgage-forgiveness programs that would help struggling homeowners.
Ely points out another reason to doubt that the stocks have any real value: The pay packages the Treasury announced Thursday for the companies’ chief executives consisted exclusively of cash compensation; no shares were offered.
In contrast, the Treasury has been requiring top executives of other large-scale recipients of federal aid to accept pay packages made up largely of stock and relatively little cash.