Update II: "Fannie's And Freddie's Last Man Standing (FRE; FNM)"
Following up on this morning's post "KBW says Fannie, Freddie common shares worthless (FRE; FNM)".
Freddie is down 22.67% while financially weaker Fannie is 'only' down 20.55%.
Here's a quick round-up of reporting on the KBW call. First up the Los Angeles Times' Money & Co. blog:
In a report, financial services research specialist Keefe Bruyette & Woods says the companies’ shares would have zero value under the workout scenario the firm believes is most likely: the creation of new Fannie and Freddie entities as mortgage guarantors owned by the banks that use their services, while the government continues to support the old Fannie and Freddie loan portfolios as they wind down.
Keefe may not be telling speculators in Fannie and Freddie shares anything they didn’t already suspect, but the report still must be spooking some of those players today: Fannie’s shares were down 25 cents, or 17%, to $1.21 at about 10:45 a.m. PDT; Freddie was off 31 cents, or 18%, to $1.41."There is general consensus that the primary role of the agencies in the future is in the loan guarantee business and not in the investment business," Keefe analysts led by Bose George wrote in the report. "By creating ‘bad banks’ of the existing portfolios and putting the existing portfolios into receivership, the government can limit its losses and define its role in supporting the mortgage industry through the crisis and create an exit strategy."
But that exit strategy would leave nothing for shareholders, the Keefe analysts assert. They believe that the companies’ combined $96 billion in debt to the Treasury -- which seized them 13 months ago after saying the firms were in danger of failing -- will grow in the near term as mortgage defaults continue to rise.
Even presuming that the old Fannie and Freddie portfolios would earn net operating profits over the next 10 years as the mortgage crisis abates, the companies still would have negative equity at the end of that period because of what they owe taxpayers, Keefe says....MORE
Here's Bloomberg's reporting:Fannie, Freddie Tumble as KBW Analysts Call Shares ‘Worthless’
...Analysts led by Bose George cut the companies’ price targets to zero today from $1 set in April, saying the entities need to be recapitalized by mortgage banks that use their services.
Fannie Mae slid 25 cents, or 17 percent, to $1.21 at 1:32 p.m. in New York Stock Exchange composite trading after falling to $1.18, its lowest intraday price since Aug. 21. Freddie Mac declined 31 cents, or 18 percent, to $1.41, after reaching its lowest since Aug. 20. The government-sponsored entities, which more than tripled in August, have retreated from 13-month highs of $2.40 for Freddie and $2.04 for Fannie on Aug. 28.
“Both the common and preferred equity of the GSEs should be worthless” if the companies are recapitalized, the analysts wrote in a research note. The companies “are acting as a direct arm of the federal government providing massive federal aid to support and revive the U.S. housing market in the midst of a crisis,” the report said....MORE
And lastly, the soon to be Bloomberg property, BusinessWeek:
...KBW downgraded Fannie and Freddie to "Underperform," its lowest rating, from "Market Perform" and cut price targets on both stocks to zero from $1.
"Our change in ratings and price targets today is primarily being made to make them consistent with the outcome that we are expecting for the companies: that they become government-run organizations and their current shareholders will not get anything in the end," George added.
Fannie and Freddie shares have been very volatile. For about a month starting in late July, the two stocks rose sharply despite analysts' warnings that the shares were worthless due to the huge debt to the government -- about $98 billion, George said Monday -- amid growing homeowner defaults and losses on guaranteed loans. For the month of August, Fannie shares had average volume of about 5.4 billion....MORE