I've been touting the attributes of shorting Fannie and Freddie prefs for quite some time, with the usual resistance from the anaysis-only pundhits of several other blogs.
The core of my point is that, regardless of yield, corporate significance, and all the other factors these so-called experts continue to put forward, the fact that Fannie and Freddie are essentially bankrupt supercedes everything.
Here's what Warren Buffett thinks about Fannie and Freddie, in case my humble comments are too extreme for you:
“They're too big to fail,” Mr. Buffett said. “That doesn't mean that the equity can't get wiped out, and it almost has. In a practical sense, as institutions, they don't have any net worth.”
Mr. Buffett forecast that “you'll see some action fairly soon” to support the companies, but that he has not been approached to assist in any bailout. He said “nothing is going to happen” to investors in the companies' insured mortgages or debt, but “the equity and preferred stock is another question.”
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and then came this:
REUTERS Moody's cuts Fannie, Freddie preferred stock rating [HZHDRZZ]
NEW YORK, Aug 22 (Reuters) - Moody's Investors Service on
Friday cut its ratings on the preferred stock of Fannie Mae
and Freddie Mac on concern that market turmoil
has hurt their access to capital.
The rating company also slashed a rating that suggests a
greater likelihood the mortgage finance giants will require
"extraordinary financial assistance" from the government or
shareholders.
Moody's lowered the preferred stock ratings on the
companies to "Baa3" from "A1," and the bank financial strength
rating to "D-plus" from "B-minus," it said in a statement.
Investors have pummeled common and preferred shares of
Fannie Mae and Freddie Mac over the past two months as
speculation grew that the pace of losses on their mortgage
holdings and guarantees is quickly eroding their capital. Many
analysts expect the government will have to exercise its new
abilities to recapitalize the companies, effectively
"nationalizing" them.
"Given recent market movement, Moody's believes these firms
currently have limited access to common and preferred equity
capital at economically attractive terms," Moody's analysts
said, of the bank financial strength rating downgrade.
Moody's added that Fannie Mae and Freddie Mac are
restricted in their ability to support the housing market,
which is in its worst downturn since the 1930s.
Who cares that there is a downgrade??? If anything we can agree that as usual Moody's is bringing the sunvisor to the beach after 9pm again.
As much as everyone wants to think that GSEs are normal, they are not.
Look at my response to your post on Accrued Interest. I will repost it here in a minute.
Posted first on AccruedInterest in response to your post there...
I beg to differ PREFTRADER, on different grounds. To foreign investors, buying preferreds in US government chartered company is buying the US Gov. If they wipe out common, ok, I understand. But if they wipe out preferreds, which are held primarily by banks and foreign sovereignties, they are going to have a huge confidence crisis on their hands.
For any normal corporation, I would agree with you regarding the risk to any subordinated capital. But FRE and FNM (and FHA) in 2007 served as a backstop for the whole mortgage industry when the private lenders fled from the securitization business. That was not good business practice, that was a government entity fulfulling it's role. Thus it will be bailed out as any government entity would.
In fact, I believe the cheapest and simplest option for the government is to provide an equity infusion that does not subordinate anyone but recapitalizes the companies. This way FRE and FNM, irreplaceable at this point in the crisis, and continue to serve their role, the shareholders (mostly banks in a headlock and foreigners) keep their pants on, and the integrity of the US government as a sovereignty willing to pay their bills and back their institutions in times of crisis remains intact to fight another day.
Think about it...
Preftrader, I am currently reviewing a classic financial analysis book called "Manias, Panics, and Crashes: A History of Financial Crises" by Kindleberger.
Here is what one of the top reviewers said...and if he is right... although they will not let on until the last minute, the government will lend FRE whatever it needs to keep going, including paying preferreds.... Rememember, even the BSC preferreds kept paying in the JPM-BSC deal
"What, in the end, is Kindleberger's moral? Most cures for dealing with financial troubles, he writes, are no cures at all. Raising interest rates has not proven particularly useful and neither has continued warning from authorities that the investing public is inflating a bubble. The solution, he believes, lies in having a lender of last resort. The trick, of course, is to avoid moral hazard and prevent the public from gambling due to the reassurance of a lender of last resort. The answer is ambiguity: the lender can come in and save the day but investors should never be certain that help is forthcoming."
thank you for the replies, Lockstep . . . and congratulations on being the very first "poster" to my blog! I think that although these organizations have a pretty significant cornerstone position to the US economy, they are unfortunately, and probably, the final and largest victims of the ABCP disaster, and the ensuing housing crunch. What happens to them will obviously be monumental, but like 911, will probably also be unlikely to be repeated. Governments and institutions will be falling all over themselves to ensure that.
For Fannie and Freddie's common and pref holders, I think it's time to start writing the obituary.
btw, I agree with your comments about Moody's and their uncanny ability to confirm the obvious after it's happened . . . but Warren Buffet is a different calibre of mind, wouldn't you say?
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