Will Fannie Mae and Freddie Mac Earn Enough to Pay Back the Taxpayer (and turn a profit for the common shareholders?) FRE; FNM

UPDATE:"Fannie, Freddie soar on opportunistic day traders (FNM; FRE)"
Original post:
We started paying attention to Fannie and Freddie on August 5th, after basically ignoring them since we posted "Is Washington Mutual Going to be the Next Bank to Fail? FDIC Would Be Out of Money (WM)" on Sept. 15, 2008.

On August 7, FNM closed at 66 cents. Yesterday it closed at $1.70. This morning it is indicating a $1.90 open, just shy of a triple in eighteen days.
Freddie's trajectory has been a bit steeper, running from 74 cents to $2.22, exactly three times on the money.
Here are our posts over the period:

Aug. 5
Moody's Downgrades Fannie Mae, Freddie Mac to "Bleak" (FNM, FRE)

Aug. 6
Bullish Speculation Spikes as Fannie Mae Rumors Swirl (FNM; FRE)

Aug. 10
Freddie Mac Shares Surge After Firm Posts Profit. "Won't Tap Treasury Funds" (FRE; FNM)

Aug. 10
What’s Driving the Rally in Freddie and Fannie (FRE; FNM)

Aug. 11
Freddie Mac Says Its Loss From Taylor Bean May Be ‘Significant’ (FRE; FNM)

Aug. 11
Fannie's Failings (FRE; FNM)

Aug. 11
Options Update: Freddie Mac Short Strangled (FRE, FNM)

Aug. 11
Stocks: The latest Fed bubble (FRE; FNM)

You may have noticed the posts focused on what used to be called "Government Sponsered Entities", now more accurately referred to as Taxpayer Owned.
Fannie and Freddie are interesting not just for their trading appeal (FRE up 128% yesterday) but because the actual underlying companies are on life-support. Politically motivated life-support. As such they can give us a measure of the frothiness of the market as well as a direct read on the politically connected crapola sector of the economy. To see the recent FRE/FNM posts, scroll down or use the blog search box....

Here's the recent action vs. the S&P (via Yahoo Finance):

We've been linking to John Hempton's ongoing series on the former GSE's (they're no longer "sponsored" they are majority owned subs of the U.S. government) since August 12.
To date we've linked to all eight of Mr. Hempton's posts, starting with parts I and II in:

"Modelling Fannie Mae and Freddie Mac – Part 1 (FRE; FNM)" and:

Aug 13
John Hempton's "Modelling Fannie Mae and Freddie Mac" Part III (FRE; FNM)

Aug. 17
Fannie and Freddie: More Defaults to Come (John Hempton's "Modelling Fannie Mae and Freddie Mac – part IV") FNM; FRE

Aug. 18
Fannie and Freddie: "I Will Survive" (alternatively: "Modelling Fannie Mae and Freddie Mac – Part V") FNM; FRE

Aug. 19
Fannie, Freddie and the Money Post-"Modelling Fannie Mae and Freddie Mac – Part VI" (FNM, FRE)

Aug. 21
Modelling Fannie Mae and Freddie Mac – Part VII (FRE; FNM)

Here'sMr. Hempton's latest:

Modelling Fannie Mae and Freddie Mac – Part VIII

In Part VII I did an “idiot check” on my credit loss numbers. They appear pretty robust. This post does an idiot check on the pre-tax, pre-provision profit estimate. Here I am less confident.

The massive rise in GSE pre-tax, pre-provision profits is one driving factor behind my assertion that the GSEs can recapitalise. In the Freddie Mac 10Q from the first quarter was this (often quoted) and profoundly bearish line.

Our annual dividend obligation, based on that liquidation preference, will be in excess of our reported annual net income in nine of the ten prior fiscal years. If continued to be paid in cash, this substantial dividend obligation, combined with potentially substantial commitment fees payable to Treasury starting in 2010 (the amounts of which have not yet been determined), will have an adverse impact on our future financial position and net worth, and will contribute to increasingly negative cash flows in future periods.

This line – or variants on this line are repeated multiple times in the recent 10Q.

This is a blunt statement that Freddie could never repay the government because it owed the government $5.2 billion per annum and that was more than the earnings in almost every prior year.

There is a little that is disingenuous about this statement – possibly deliberately. The statement compares the obligations to the Treasury to the post-tax, post provision income for the past decade. In most years the pre-tax, pre-provision income of Freddie was in excess of $5.2 billion (which would have allowed some repayment). But far more to the point – the current pre-tax, pre-provision income is in excess of $15 billion. After write-backs they dealt with over 8 billion of the 50 odd billion outstanding in one quarter in Q2 – but they are not permitted to make the actual repayment (more on that in a later post).

Here is a cut-down version of the profit and loss account from the last quarter...MORE

Nightly Business Report: "The President's Plan for Fannie Mae & Freddie Mac" (FNM; FRE)

UPDATE: "Privatize Fannie and Freddie? Easier Said Than Done (FNM; FRE)"
Original post:
This is a confused and confusing story. It's not for any lack of effort on NBR's part but because the cross-currents of the various interests are incompatible.

We post it not because it gives answers for the final resolution of the financial black holes that are the former GSE's but for some insight into the thinking that might shape their final disposition.
We will have more clarity on the administration's ideas when the White House presents its budget on February 1st.
From NBR:

TOM HUDSON: President Obama is expected to lay out plans to overhaul mortgage giants Fannie Mae and Freddie Mac as part of his budget due out early next month. Taxpayers could be on the hook for an estimated $400 billion in losses over the next decade. Recently the administration quietly lifted the $400 billion cap on government aid for Fannie and Freddie. As Stephanie Dhue reports tonight, that move raises questions about their future.

STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fannie Mae and Freddie Mac don't make loans; they buy mortgages from lenders and sell them to investors, with a guarantee against default. Losses at the mortgage giants weren't expected to exceed $400 billion. But now that Uncle Sam is offering unlimited aid, economist Dean Baker worries the administration will use the firms for a back-door bailout.

DEAN BAKER, CO-DIRECTOR, CTR. FOR ECONOMIC & POLICY RESEARCH: There's zero accountability, so are they going to Citigroup and buying up their mortgages? Are they doing it with a whole range of banks? Who are they favoring? Who are they not favoring? We have no idea what they're doing.

DHUE: Congress and the administration still have to figure out what to do with the mortgage siblings in the future. The CEO's of Fannie and Freddie recently received $6 million pay packages. Some read that as a sign the companies will ultimately return to private ownership. But House Financial Services Committee Chairman Barney Frank says that would be a misread.

REP. BARNEY FRANK, CHMN., HOUSE FINANCIAL SERVICES COMMITTEE: That doesn't foreshadow anything about them going forward. In fact, Fannie Mae and Freddie Mac will not exist in anything like what they now are going forward. Exactly what, we don't know.

DHUE: One idea is to fully nationalize the firms, putting them on the government's balance sheet. Another is to return the companies to private ownership, but under tight controls over their fees and how much money they could make. James Lockhart was the regulator for Fannie and Freddie until August of last year. He says there could also be a return to private ownership with a different kind of guarantee.

JAMES LOCKHART, FORMER DIR., FEDERAL HOUSING FINANCE AGENCY: It may take some sort of reinsurance, some sort of catastrophic insurance by the government maybe. The FDIC is not necessarily the best model, but something like that, that there would be an insurance program for whoever is providing these mortgage- backed securities pays into up front, so that there's a fund there if there's a problem in the future.

DHUE: But Frank says what there won't be is a return to the way Fannie and Freddie were.

FRANK: There will be entirely new forms. You will not see the kind of hybrid you saw before. There will not be a private stock company with a public function the way they had.

DHUE: While the president is expected to lay out overhaul plans for Fannie and Freddie, analysts don't expect any major policy decisions until it's clear mortgage markets and home prices have stabilized.

Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.

The most honest approach would be to nationalize the former GSE's. The problem is in the word honest. If the administration were to acknowledge the truth of the existing situation it would have to take the balance sheets of the two entities onto the government's books.

I just don't see how they can do that. It appears we will have to maintain the polite fiction that these institutions are distinct from the rest of the government. This will cost the U.S. taxpayer the 'agency spread' on Fannie and Freddie's debt, currently around 2/3 of a percentage point more than comparable Treasury's, multiplied by the trillions in debt they will be issuing. Even a single basis point is $100 million in added interest expense when multiplied by a "T".

As we've pointed out, analyzing this stuff is more about reading the mood of the regulators and politicians than it is about balance sheet or cash flow analysis.

Although I don't have any inside information on this, my best guess is that current common shareholders will get wiped out with maybe some warrents or an equity stub as a bone to this rather powerless constituency.

For more thoughts on how this might end up see:

Fannie Mae, Freddie Mac: "Estimated GSE Losses = $448 Billion" (FNM; FRE)

For a Quicker Housing Fix: Nationalize Fannie, Freddie? (FNM; FRE)

A Warning for Fannie Mae and Freddie Mac Shareholders: Lessons From Alternative Energy Investing (FRE; FNM)

Rep. Barney Frank: Lenders Fannie and Freddie now a 'public policy instrument' (FRE; FNM)

Fed economist calls for US government Mortgage Backed Securities guarantees (FNM; FRE)

U.S. to Lose $400 Billion on Fannie, Freddie, Wallison Says (FRE; FNM)

After TARP: Hidden bank subsidies-12/30/2009 (BAC; C; FNM; FRE)

Lawmakers Want Probe Into Treasury Aid for Fannie, Freddie (FRE; FNM)

The Price for Fannie and Freddie Keeps Going Up (FNM; FRE)

Fannie Mae, Freddie Mac exec pay suggests stock worth nothing (FNM; FRE)

Credit Suisse: Fannie, Freddie Action Means Large Scale Buyouts of Loans in Their Securities (FNM; FRE)

Fannie, Freddie Soar 20% on Treasury’s “Blank Cheque” (FNM; FRE)

Big Decision Looms on Fannie, Freddie (FNM; FRE)

A Penny for Your Thoughts, Fannie Mae, High Frequency Trading and a Quadruple in a Week (FNM; FRE)

No, I am not predicting a quadruple, I'm wearing my market historian hat.

Just so you know we're not just another Fannie watcher, we have posts going back to 2007 on the former GSE's, among them this, from March 11, 2008: "Is Fannie Mae the Next Government Bailout? (FNM; FRE)".
We followed up four months later with "Federal Reserve: Send in the Helecopters, No GSE Left Behind (FNM; FRE)".

It got to the point that by Jan. 6, 2010 I was writing, in "A Warning for Fannie Mae and Freddie Mac Shareholders: Lessons From Alternative Energy Investing (FRE; FNM)":

We've had a lot of posts on FNM and FRE, here are the results of a keyword search using the 'Search Blog' feature.
I've been at the market my entire adult life, I'm getting tired of these two. 

Here's the quadruple and why it won't happen again.

On November 21, 2008 FNM closed at $0.30.
On November 28, 2008 FNM closed at $0.90 after trading as high as $1.25.
Easy money.
Not.

Here's FT Alphaville:

A penny for the Freddie, Fannie guys?

On Wednesday, the Federal Housing Finance Agency announced it would de-list both Freddie Mac and Fannie Mae from the New York Stock Exchange.
As the FHFA stated, Fannie Mae’s closing stock price had been below the required $1 average price for the past 30 trading days. And so:

Per NYSE rules, a company in that condition must either drop from the exchange or undertake a ‘cure’ to restore the stock price above the $1 mark if it does not meet the NYSE’s minimum price requirements.

Freddie Mac’s de-listing, however, was purely a voluntary move by the agency. As they explained:

“A voluntary delisting at this time simply makes sense and fits with the goal of a conservatorship to preserve and conserve assets,” said DeMarco.

But none of that is what’s really interesting.
What is interesting, is how the stocks behaved immediately after the announcement.
(Note that the two companies will only begin trading over-the-counter from July 8 onwards, and they both remain listed until then).
Anyway, here’s Fannie:

And here’s Freddie:

Both charts reflect a big fall in stock value as well as a sizable surge in volumes traded.
Which is interesting since the Zero Hedge blog has been writing for a while about how trade in Freddie and Fannie, alongside other low-priced stocks like AIG and Citi, has on occasion amounted to 20 per cent of total market volume on no news whatsoever in the last year.
The big difference at those times, however, was that the value of the stocks was actually boosted:

With that in mind, it’s worth pointing out that the SEC is currently seeking public comment on whether or not there may be a larger than normal incentive for broker-dealers to internalise trades in stocks that are low priced and plentiful in number. Which, of course, would be stocks like Freddie and Fannie.
As they asked in their January concept release:

In low-priced stocks, the minimum one cent per share pricing increment of Rule 612 of Regulation NMS is much larger on a percentage basis than it is in higher-priced stocks. For example, a one cent spread in a $20 stock is 5 basis points, while a one cent spread in a $2 stock is 50 basis points – 10 times as wide on a percentage basis. Does the larger percentage spread in low-price stocks lead to greater internalization by OTC market makers or more trading volume in dark pools?

You can read more about the so-called ‘sub-penny’ arbitrage here and here.
The point, however, is that if such favourable opportunities exist in low priced and plentiful stocks (especially for broker-dealers who can internalise trades), you can bet they only really make money when the trades are conducted at very high volumes, and very very quickly.
In other words, it’s an arbitrage opportunity for algorithmic high frequency trading broker-dealers in particular.
The fact that Wednesday’s high volumes came alongside large and sudden drops in the stocks’ values, would hence suggest the moves are simply the result of some large-scale unwinding of algorithmic programmes by broker-dealers in anticipation of the stocks’ de-listings.
And those are the same programmes which probably contributed to driving up the stocks’ prices in high volume trading beforehand.

In short, de-listing clearly equals the end of a unique high-frequency arbitrage opportunity for some.

See also:

MUST READ: "Finally: Fannie, Freddie and Delisting" (FNM; FRE) Plus "Line of the Day"

Fed economist calls for US government Mortgage Backed Securities guarantees (FNM; FRE)

For Fannie and Freddie shareholders: Always remember, the survival of the corporate entities does not imply the survival of equity investments in the common. The only reason the Federales forbear on a wipeout is the hassle of taking the current conservatorship to the endgame, receivership.**
As we promised in our Dec. 30 post "The Price for Fannie and Freddie Keeps Going Up (FNM; FRE)":

This is a bookmark as much as anything else. Next month we'll get into some serious questions:

1) If the Treasury backstop is now "explicit", why the heck are the agencies paying higher yields than comparable treasuries.

2) With rising interest rates (thus falling prices) all but baked in, who is going to take the other side of the interest rate swaps that Fannie and Freddie need to manage their portfolio risk? AIG? Lehman?

3) Is Chairman Bernanke taking a page from Greenspan's book (using the agencies as liquidity providers during the Russian default/LTCM meltdown of 1998)?

All these fascinating queries and more, coming up!

Here's one part of the equation, question one, from Reuters:

* Fed economist wants asset-backed securities guaranteed

* Would avert Fannie Mae, Freddie Mac collapse, he argues

* Suggests guarantees similar to FDIC's structure

* Comments come as fate of Fannie Mae/Freddie Mac debated

By Joe Rauch

ATLANTA, Jan 3 (Reuters) - A U.S. Federal Reserve economist called on Sunday for the creation of a new federal institution to backstop losses on asset-backed securities to prevent any future collapse of mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

The government had to take over the mortgage finance companies in 2008 as a devastating financial crisis worsened. The two had been shareholder owned, but their congressional charters and Treasury lines of credit lent their debt securities a status just short of U.S. Treasuries in the eyes of investors.

"There ought to be government-backed ABS," said Fed economist Wayne Passmore in a presentation to the American Economic Association.

Atlanta Federal Reserve Bank President Dennis Lockhart participated in the session but did not make comments.

Fannie Mae and Freddie Mac, even under government control, play a major role in U.S. mortgage finance, and President Barack Obama has promised to propose early in 2010 how the companies should be structured in the future....MORE

Here's a bit on question three, from the Dec. 31 New York Times' article "Doubts on Regulation and Renewal Hang Over Wall St.":

...Right now, low rates are fattening banks’ profit margins, since many lenders are not passing on their own low costs to borrowers.[*] Lending rates will also spike as the government withdraws its trillion-dollar support of the mortgage market in the spring.

“Are they going to kill the housing market?” said Laurence D. Fink, chief executive of BlackRock, a big money management firm. “That is an issue.”

Most banks are hunkering down in anticipation of another big wave of real estate and consumer loan losses. Small and midsize banks are expected to be hit especially hard: They must absorb nearly $900 billion of commercial real estate losses over the next few years, causing several hundred banks to fail....

Both links were in the ZeroHedge post "In The Year 3000: Predicting The Liability Side Of The Fed's Balance Sheet"

*We first raised the "reliquify the balance sheets" question in our December '08 post "Mom, Ben Bernanke Likes Bankers Better than He Likes You"":

Savers are getting screwed as banks reliquify their balance sheets.
The ostensible reason short rates are now officially at 0.2% is to encourage banks to lend.
It's not going to happen. The banks are not taking on individual's or commercial's risk. Auto loans for a FICO score of less than 720 aren't being written.
So what are they doing? Carry-trade (say it like "Toga party").
For months, the borrow U.S. short, lend U.S. long has been used to rebuild banks balance sheets, destroyed by their former business practices.

Now with the Fed explicitly committed to lowering long rates (the 30-year trading at 2.63%, the 10-year at 2.144%), even borrowing at 0.2% doesn't give enough spread to run cash flow through the income statement and onto the bank's balance sheets.
What will the banks do? My guess is they will start buying sovereign debt for the yield, maybe even selling it to the Fed so they can take the money and do it all over again.
Right now Australian 15-years are priced at 4.20%.

Today, the American saver gets a pittance in a money market. It's really nothing but a wealth transfer racket.
Mom, we're going to Sydney.
Similar thoughts at "Investment Postcards from Cape Town":

...Hat tip: Mish, Global Economic Analysis

I joke around a lot but decided to get serious in our Oct. '09 post "Markets-Where Do We Go From Here?: Bank Earnings (BAC; C; GS; JPM)" [then he started cracking wise again -ed]:

...In September we pointed out the change in leadership the markets were experiencing, the bank sector which had led from the March 9 low were weakening. This has reversed in the last week and more particularly on Friday (KBW Bank Index [BKX] vs S&P):

There is much handwringing about the bank's failure to lend.
Chairman Bernanke and the bankers are crying crocodile tears.

This is a deliberate policy. The banks get to play the U.S.'s do-it-yourself carry trade, borrow at an average .30% and lend at 4.00% (U.S. treasuries) 5.00% (mortgages) 10% (commercial loans), 12-28% (credit cards). They are literally printing money.

The Fed benefits by the banks buying treasuries because it allows them to perform their Quantitive Easing (monetizing the debt, i.e. printing money) in the mortgage market, cleaning up Fannie and Freddie's balance sheets. If the Fed didn't have the banks in the treasury markets interest rates would be considerably higher right now.
Everyone wins. If you forget about mom and pop savers.

Another wrinkle is the change the Financial Accounting Standards Board made last spring regarding how banks get to write down/write up their junk assets.
The new rules basically allow them to use whatever valuation they need to meet regulatory capital requirement. Cool huh?

Back when the FASB was considering the change we thought it was a big enough deal to put up multiple posts:

March 25
Banks to Write-UP Assets?

Following my mission critical (coffee a.m., lights p.m.) duties in importance is attempting to ascertain (sometimes feebly) regulatory impacts and how to make a buck off them. Here's one worth looking at, from the National Center for Policy Analysis:...

March 30
Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes
April 2
FASB Eases Fair-Value Rules Amid Lawmaker Pressure
April 2
Markets: Why the FASB Decision Matters

On Monday March 30 we posted "Getting Ready for the Wednesday/Thursday Market Pop":

As I said in the post immediately below, reality has attempted to intrude on the blogging.
I won't get all Fibonacci or 50-day on you, this decline has an odd feel to it. We might be setting up a nice mid-week run. The DJIA is currently down 307 at 7468 and the S & P is down 53.81 at 1491....

One of our rationales was the FASB move we'd been reporting was coming.
On Wednesday April 1 we posted "U.S. stock futures slip to start second quarter":

Great. Here I am calling for a midweek pop in the market and Dow futures indicate down 52.
Will this thwart my plans for world domination? In the words of Jimmy James (News Radio):

Mr. James:
"The original title of this book was 'Jimmy James, Capitalist Lion Tamer' but I see now that it's... 'Jimmy James, Macho Business Donkey Wrestler'... you know what it is... I had the book translated into Japanese then back in again into English. Macho Business Donkey Wrestler... well there you go... it's got kind of a ring to it don't it?

Anyway, I wanted to read from chapter three... which is the story of my first rise to financial prominence... I had a small house of brokerage on Wall Street... many days no business come to my hut... my hut... but Jimmy has fear? A thousand times no. I never doubted myself for a minute for I knew that my monkey strong bowels were girded with strength like the loins of a dragon ribboned with fat and the opulence of buffalo... dung. ...Glorious sunset of my heart was fading. Soon the super karate monkey death car would park in my space. But Jimmy has fancy plans... and pants to match. The monkey clown horrible karate round and yummy like cute small baby chick would beat the donkey."

-Episode #57 "Super Karate Monkey Death Car"
By way of EvilZero.com

Well there you go. Pretty much says it all....
...By the bye, tomorrow the FASB will meet to decide whether to rescind mark-to-market accounting for the banks, see "Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes".

We gave you the rest of the story on May 30:
Thoughts on Markets, Investing and Life

The Dow Jones Industrial Average closed up 152.68 that day and a further 216.48. the next.
The run actually started a day earlier than I thought it would, with an 86 point advance on Tuesday.

Mom used to say, "It's great fun to fool around, just get your homework done first."

And there you go. One of the reasons we posted "Do not sell equities, Credit Suisse says" a week ago.
Update- one more thing to factor in, From Bloomberg:

Writedowns on Mortgage Servicing Make Even JPMorgan Vulnerable
The four biggest U.S. banks by assets may have to take writedowns on $55 billion of mortgage- collection contracts after marking them up by $11 billion in the second quarter, casting a shadow over earnings....

Well there you go.

**See also:

Walker F. Todd, “Bank Conservatorship and Receivership,” Economic Commentary, October 1, 1994, Federal Reserve Bank of Cleveland. It can be accessed at http://www.clevelandfed.org/research/commentary/1994/1001.pdf.

And our recent posts on the GSE's:

U.S. to Lose $400 Billion on Fannie, Freddie, Wallison Says (FRE; FNM)

After TARP: Hidden bank subsidies-12/30/2009 (BAC; C; FNM; FRE)

Lawmakers Want Probe Into Treasury Aid for Fannie, Freddie (FRE; FNM)

The Price for Fannie and Freddie Keeps Going Up (FNM; FRE)

Fannie Mae, Freddie Mac exec pay suggests stock worth nothing (FNM; FRE)

Credit Suisse: Fannie, Freddie Action Means Large Scale Buyouts of Loans in Their Securities (FNM; FRE)

Fannie, Freddie Soar 20% on Treasury’s “Blank Cheque” (FNM; FRE)

Big Decision Looms on Fannie, Freddie (FNM; FRE)

Fannie Mae, Freddie Mac exec pay suggests stock worth nothing (FNM; FRE)

Fannie's trading up a few cents, Freddie's down a penny.
CNN pointed this out in their Christmas Eve story "Big paydays for Fannie and Freddie bosses":

...DeMarco said the pay packages were set in consultation with Kenneth Feinberg, the Obama administration's pay czar, who has to sign off on pay for executives at firms that received the most help from the Troubled Asset Relief Program.

But unlike typical pay packages for public companies, none of the executives are receiving stock grants or options as part of their compensation. That significantly reduces the risks for the executives at Fannie and Freddie.

The top executives at other firms receiving bailouts, such as American International Group (AIG, Fortune 500) and General Motors, are receiving stock in their companies as part of their packages. Even some firms no longer under federal pay limits, such as investment bank Goldman Sachs (GS, Fortune 500), announced that all bonuses would be paid in stock rather than cash this year.

DeMarco pointed out that there is great uncertainty about whether the federal government will continue to operate the firms into the future. The could end up making Fannie and Freddie's current shares worthless.

"As this debate progresses, it will be essential that the enterprises continue to perform their current role," DeMarco said.

Pinto said the lack of any stock in the pay packages are a clear signal that neither company will remain a publicly-traded company in the long-term....

Here MarketWatch's take:

...recently disclosed pay packages for Fannie (FNM 1.31, +0.04, +3.15%) and Freddie (FRE 1.59, -0.01, -0.63%) executives suggest the shares are worthless, Bose George, an analyst at Keefe, Bruyette & Woods, wrote in a note to investors.

Fannie Chief Executive Michael Williams and Freddie CEO Charles Haldeman got $6 million annual compensation packages, according to regulatory filings last week. See details of their pay.

To get all that money, the companies have to meet longer-term performance targets. But the packages don't include any stock, despite the fact that the government's pay czar Kenneth Feinberg has been pushing for more stock-based compensation to better align management and shareholder interests.

A portion of Williams' and Haldeman's compensation will come from "deferred salary," which is cash that will be paid only if Fannie and Freddie meet performance goals set by the companies' boards and reviewed by the Federal Housing Finance Agency, their regulator.

This is supposed to replicate "stock salary" that Feinberg approved for executives at companies that benefited from huge government bailouts. However, because of Fannie and Freddie's "unique circumstances," this part of their CEOs' compensation will be in cash, the Federal Housing Finance Agency said in a Dec. 24 statement.

What makes Fannie and Freddie unique is that the companies can't issue new common stock for executive compensation without getting Treasury's approval first. But that probably wasn't a "meaningful impediment," KBW's George noted.

"The more obvious reason is that the shares have no long-term value and that no executive would accept unvested shares of the companies as part of their compensation package," the analyst said.

"This reinforces our view that the common shares will eventually trade to zero," George concluded. "The companies will never be able to repay the government.

See also:
Fannie's And Freddie's Last Man Standing (FRE; FNM)

An excellent piece by Maurna Desmond at Forbes:

KBW analyst Bose George is the only Wall Street analyst still covering the mortgage giants. He talks to Forbes about their future.

KBW says Fannie, Freddie common shares worthless (FRE; FNM)

Fannie, Freddie shares dive on zero-value prediction (FRE; FNM)

Fannie Mae, Freddie Mac "The new GSE as zero meme – laying the assumptions bare – and a modest plan for Obama" (FNM; FRE)

"No Fundamental Value" For Fannie Mae and Freddie Mac - Analyst (FRE; FNM)

A follow-up to the post immediately below, "Let’s Wind Down Fannie Mae and Freddie Mac
(FRE; FNM)"
From StreetInsider:

FBR Capital is reiterating their Underperform rating on Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) following the recent run-up in the shares. The firm believes there is no fundamental value remaining in FNM and FRE, particularly since the government owns 80% of each company.

The analyst commented, "To date, Uncle Sam has invested $96.3 billion in the GSEs, and we expect more government capital injections in the coming quarters. FNM and FRE shares have moved materially in the last two weeks on speculation that a reverse stock split will take place. However, we would note that even in the GSE's regulatory filings, the companies point out that their management teams are not in favor of reverse stock splits, despite the potential for the shares to be delisted from the NYSE. However, the boards of directors and regulators will impact the decision, and to our understanding, the decision on a potential reverse stock split has not been made. In our opinion, the regulators will not want to create a false sense of value in FNM and FRE shares and will likely shy away from reverse stock splits." >>>MORE

Frank to Recommend Replacing Fannie Mae, Freddie Mac (FNM; FRE)

UPDATE: "Fannie Mae is Deer Nuts (FNM)"
Original post:
Fannie is down 6 cents at $1.01; Freddie is down a dime at $1.21. On January 6 we posted "A Warning for Fannie Mae and Freddie Mac Shareholders: Lessons From Alternative Energy Investing (FRE; FNM)":

Freddie's trading down a couple cents at $1.41, Fannie's down 3 at $1.12....

...Now that we have the government explicitly saying that the profit-seeking part of the weird old quasi-public mission is history there is no reason to own the stock....

Emphasis in original, I can't put it any more bluntly than that.
From Bloomberg:

Representative Barney Frank said his committee will push to replace Fannie Mae and Freddie Mac, seized by regulators almost 17 months ago, with a different model for U.S. mortgage financing.

“The committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,” Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, said at a hearing in Washington today. “That’s the approach, rather than a piecemeal one.”

Fannie Mae and Freddie Mac, the largest U.S. mortgage- finance companies, have received $110.6 billion in taxpayer- funded aid since regulators took over the government-sponsored enterprises in September 2008 after determining they had inadequate capital to deal with a rise in mortgage defaults.

Treasury Secretary Timothy F. Geithner said in an interview yesterday that he doesn’t think Congress will be able to pass legislation restructuring the companies until next year.

“We are committed to propose a set of detailed reforms beginning this year,” Geithner said in an interview on “PBS NewsHour.” “I don’t think we’re going to be able to legislate that until that process can start until next year, because it’s just a complicated thing to get right.”

“But we are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country,” he said in the interview....MORE

From the Wall Street Journal:

Fannie Mae, Freddie Mac Should Be Eliminated, Frank Says

From MarketBeat:

Barney Frank: Fannie, Freddie Bye Bye

“As I believe, this committee will be recommending abolishing Fannie Mae and Freddie Mac in their present form and coming up with a whole new system of housing finance.”

Such a salvo from U.S. Representative Barney Frank (D., Mass.) sent shares of the government-sponsored (and government-controlled) housing entities lower this morning.

That Fannie and Freddie are a mess of misplaced priorities, culminating from years of public/private influence, is no secret. That the two companies — which went into Federal conservatorship in September 2008 — continue to trade publicly is an even larger conundrum....MORE

A few years ago a friend sent me a news story about some exurbanites who were complaining about a cattle feeding property. The owner of the feedlot said "This big cattle operation didn't sneak up on these people in the middle of the night. We've been here a long time, they just chose to ignore it for their own reasons. The manure's always stunk"

I have the same feeling about the former GSE's and their common shareholders, see links below.

That MarketBeat headline got me singing "Na Na Hey Hey Kiss Him Goodbye". Here's Bananarama's cover:

Another tune that came to mind was "Banking Queen":

Previously:

Jan. 21 (lots o'links): Nightly Business Report: "The President's Plan for Fannie Mae & Freddie Mac" (FNM; FRE)

Jan. 5: Rep. Barney Frank: Lenders Fannie and Freddie now a 'public policy instrument' (FRE; FNM)

Dec. 29: Fannie Mae, Freddie Mac exec pay suggests stock worth nothing (FNM; FRE)

This Day in the Financial Crisis, Sept. 7, 2008: Take a Load off Fannie

The deed was done.

Sunday September 7, 2008.

Fannie Mae, Freddie Mac Roundup II: Saturday (FNM; FRE)

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers  

A break in the action: Scientific American was starting a series on the neuroscience of chance:

Why Our Brains Do Not Intuitively Grasp Probabilities

And back to the GSE's:

Initial Reaction to Fannie Mae, Freddie Mac Bailout- Sunday Morning (FNM; FRE)

U.S. Credit Rating unaffected by Fannie Mae Freddie Mac Bailout. And: Preferred Junk (FNM; FRE)

A mashup went viral on the 7th (since pulled down by the GOOG):
Take a load off Fannie (FNM;FRE)

This video was going around a few weeks ago and, as is becoming more common in my dotage, I misplaced the bookmark. Thanks to Portfolio, I found it while looking for"Liquid cooled Underwear and Other Micro-climates"
 (don't ask).

Sunday Afternoon with Fannie Mae and Freddie Mac (FNM; FRE)

That concludes our Sunday coverage of Fannie and Freddie, we'll have more tomorrow but for now, back to our regularly scheduled programming:

Organic food to be re-branded 'budget' to beat credit crunch

The hurricane was still coming:

Hurricane Watch: Ike to Strafe the Length of Cuba

And we were looking forward to the market open on Monday the 8th.

Fannie Mae Targeted by Skeptical Spread Trader (FNM)

From Schaeffer's Research:

Option volume is heating up lately on Fannie Mae (FNM). In today's session, call volume has ramped up to two times the daily average, after rising to seven times the norm on Tuesday. However, a closer look at today's activity reveals that there's not necessarily a bullish slant to this speculation....

...Digging deeper into the stock's front-month option activity, it looks like one trader has opened a particularly bearish short call spread on FNM. At 9:31 a.m., two blocks of 1,000 contracts each traded on the equity's September 1 call and September 3 call. The lower-strike calls traded at the bid, suggesting they were sold, while the higher-strike calls crossed the tape at the ask, indicating that they were purchased.

With FNM trading at $1.90 at the time this trade was opened, this is a rather aggressive short call spread. The trader needs FNM to fall back below $1 per share by the time September-dated options expire in order to avoid being assigned on the sold calls....MORE

Fannie, Freddie Plunge Over 30% Each (FNM; FRE)

 UPDATE: MUST READ: "Finally: Fannie, Freddie and Delisting" (FNM; FRE) Plus "Line of the Day"
Original post:
Fannie is down 37.28% at $0.58, Freddie is down 39.34% at $0.74.
If you can borrow the shares there is still an opportunity for a 100% profit.
We've been harping on the risk in these two for months, so if a speculator wants to hand their money to us, that's their idiocy. Here's a January 6, 2010 post:
A Warning for Fannie Mae and Freddie Mac Shareholders: Lessons From Alternative Energy Investing (FRE; FNM):

Freddie's trading down a couple cents at $1.41, Fannie's down 3 at $1.12.
Yesterday's post "Rep. Barney Frank: Lenders Fannie and Freddie now a 'public policy instrument' (FRE; FNM)" sealed the fate of the former GSE's.

We covered Keefe Bruyette's zero valuation in "KBW says Fannie, Freddie common shares worthless", "Fannie, Freddie shares dive on zero-value prediction" and "Fannie's And Freddie's Last Man Standing".

By any measure of GAAP the giants are bankrupt. The life support from the treasury does nothing to alter that fact.

Now that we have the government explicitly saying that the profit-seeking part of the weird old quasi-public mission is history there is no reason to own the stock.

One of the talents required for investing in the area known as political capitalism is the ability to correctly interpret government policy. It is as important as understanding the interplay between a company's cash-flow statements and balance sheets. Maybe more so.

This ability is crucial in cleantech/greentech/alt-energy and helped inform our analysis of General Motors.
Back in February '08 we posted "Short GM to Zero: Obama Auto Team Drives Imports":

The stock was recently $1.86 up nine cents.
From the Detroit News:

The vehicles owned by the Obama administration's auto team could reflect one reason why Detroit's Big Three automakers are in trouble: The list includes few new American cars. Among the eight members named Friday to the Presidential Task Force on the Auto Industry and the 10 senior policy aides who will assist them in their work, two own American models. Add the Treasury Department's special adviser to the task force and the total jumps to three....MORE

Although the tone was humorous the result was dead serious. We followed up in March with
"GM Shares Crater As Auto Team Meets At White House":

Shares of GM have been getting hammered due to growing speculation the beleaguered auto maker is edging closer to filing for bankruptcy.

The stock dropped as low as $1.28 (down 58 cents/more than 30%). At that price, GM shares were trading at their lowest level since April of 1933.

Today's sell off is fueled largely by fears GM executives are more open to the idea of filing for bankruptcy. Going into chapter 11 would wipe out GM shares, and those who still hold GM stock are thinking it's probably better to get something instead of nothing for their investment....

And again in May with "Hey! How are We Doing With "Short GM to Zero: Obama Auto Team Drives Imports":

The stock just traded at $1.20 down 24 cents (16.7%) on the day. The original thesis still stands.
(don't ya just hate the term "investment thesis"?)
The company was insolvent back in November. The only question was political.
The "Auto Team..." post was just shorthand for which way the wind was blowing.
Originally posted February 23, 2009...

Short GM to Zero: Obama Auto Team Drives Imports

...Since that date the Dow Jones Industrial Average, of which GM is a component, is up 1263.61 points or 15% while GM is down 35.48%. It is going to zero.

Take the hint.
We've had a lot of posts on FNM and FRE, here are the results of a keyword search using the 'Search Blog' feature.
I've been at the market my entire adult life, I'm getting tired of these two.

For a Quicker Housing Fix: Nationalize Fannie, Freddie? (FNM; FRE)

It wasn't for grins and giggles that we posted "A Warning for Fannie Mae and Freddie Mac Shareholders: Lessons From Alternative Energy Investing (FRE; FNM)" earlier this month.
Freddie's up a penny at $1.39, Fannie's flat.
From the Wall Street Journal's Developments blog:

Should Fannie Mae and Freddie Mac be nationalized?

The government last month took a big step to underscore its support for the mortgage-finance giants when it pledged to cover unlimited losses over the next three years. But the plan has always been to ultimately return Fannie and Freddie to private ownership. Some say Uncle Sam should end that illusion and, instead, nationalize the companies in order to more aggressively stabilize the housing market.

One such scenario, outlined by Thomas Stanton, a fellow at the Center for the Study of American Government at Johns Hopkins University, would have the government nationalize Fannie and Freddie for the next five years, with an option to renew government ownership every five years after that.

By nationalizing Fannie and Freddie, the government would be able to more quickly clean up the housing market. The government could remove fees and other hurdles that have made it less attractive to refinance a mortgage through Fannie and Freddie, they could create new consumer protections for mortgages, and the government could more quickly modify mortgages for troubled borrowers, Mr. Stanton said in remarks at a conference on the future of Fannie and Freddie sponsored by Ralph Nader’s Center for Study of Responsive Law.

That still seems to be a remote prospect. It would require the U.S. to bring Fannie and Freddie’s $5.5 trillion in mortgage guarantees and related investments onto the government’s balance sheet, and it could lead to larger immediate losses that would be added to the nation’s growing deficit....MORE

Previously:

Rep. Barney Frank: Lenders Fannie and Freddie now a 'public policy instrument' (FRE; FNM)

Fed economist calls for US government Mortgage Backed Securities guarantees (FNM; FRE)

"Federal Housing Finance Agency Directs Delisting of Fannie, Freddie Stock From NYSE " and "Fannie, Freddie delisting not due to performance-FHFA" (FNM; FRE)

 UPDATE II: "MUST READ: "Finally: Fannie, Freddie and Delisting" (FNM; FRE) Plus "Line of the Day""
UPDATE: "Fannie, Freddie Plunge Over 30% Each (FNM; FRE)"
Original post:
It's about time.
In early pre-market Fannie is trading up 6 cents.
Anyone still holding the common would be better off selling the stock and buying lottery tickets.
From Bloomberg:

The Federal Housing Finance Agency has directed Fannie Mae and Freddie Mac to delist their common and preferred stock from the New York Stock Exchange and any other national securities exchange. When completed, Fannie’s and Freddie’s common and preferred stock is expected to be quoted on the Over–the-Counter Bulletin Board, the agency said in an e-mailed statement. 

From Reuters:

The regulator for mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) on Wednesday said the decision to delist them from the New York Stock Exchange was no reflection on their performance.

In a statement, the Federal Housing Finance Agency said its decision was based on Fannie Mae's stock price falling below NYSE's required minimum of $1 per share.
"FHFA's determination to direct each company to delist does not constitute any reflection on either enterprise's current performance or future direction, nor does delisting imply any other findings or determination on the part of FHFA as regulator or conservator," FHFA Acting Director Edward DeMarco said. (Editing by Theodore d'Afflisio)

Fannie, Freddie Soar 20% on Treasury’s “Blank Cheque” (FNM; FRE)

Update III: "Fannie Mae, Freddie Mac exec pay suggests stock worth nothing (FNM; FRE)"
Update II: "Credit Suisse: Fannie, Freddie Action Means Large Scale Buyouts of Loans in Their Securities (FNM; FRE)"
UPDATE: This is such a big deal we are still working on the implications. We'll have more later today or tomorrow morning.
Original post:
In premarket trade Fannie's up 20%, Freddie's up 21%.
From Barron's "Stocks to Watch Today" blog:

Shares of mortgage issuers Fannie Mae (FNM) and Freddie Mac (FRE) are surging this morning on the U.S. Treasury Department’s announcement Thursday, after the close of the shortened session, that it will amend its agreements with both firms to allow for, in a sense, unlimited funding of both institutions. The Treasury said it will amend its preferred stock purchase agreement (PSPA) with both, which had been capped at $200 billion, to allow its funding commitment “to increase as necessary to accommodate any cumulative reduction in net wroth over the next three years.”...MORE

From Bloomberg (Christmas Eve):

U.S. Removes Caps on Fannie, Freddie Lifelines for Three Years

The U.S. Treasury Department said today it will remove the caps on assistance to Fannie Mae and Freddie Mac for the next three years to alleviate market concern about the effect of limited government assistance.

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each in backstop capital from the Treasury. Under the new agreement, these caps can rise as needed to cover net losses over the next three years.

Fannie Mae and Freddie Mac now are using a combined $111 billion of the total $400 billion in available assistance. Treasury Department officials said they did not expect the companies to need assistance beyond what is available under the current caps, barring significant deterioration in the economic outlook.

Today’s announcement “should 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,” the Treasury said in a statement in Washington.

The Treasury also relaxed its timeline for Fannie Mae and Freddie Mac to shrink their portfolio of retained mortgages. Previously, the companies were instructed to shrink their portfolios at a rate of 10 percent a year. Now, they will be required to keep their portfolios below a maximum limit, currently $900 billion, that will fall by 10 percent a year....MORE

"Long-Term Speculator Synthetically Shorts Fannie Mae" (FNM) ABK; AIG

The stock ran yesterday, up 12.73% to $1.24.
It was garbage day at the market, AIG up 8%, Ambac up 104.55% (you read that correctly), MBIA up 5.33%, Freddie up 13.87%
As the penny stock frauds (First Jersey, Stratton Oakmont, Blinder Robinson et al) used to say:

Talkin' trash and makin' cash!!!

From BloggingStocks:

Last Friday, bailed-out mortgage lender Fannie Mae (FNM) was the target of a skeptically skewed options strategy. Around midday, the stock's January 2012 1-strike put and 1-strike call each traded a block of 9,995 contracts, both of which were marked "spread." The put options traded at the ask price, suggesting they were purchased, while the calls changed hands closer to the bid price -- indicating they were sold. Open interest at both strikes surged by roughly 10,000 contracts over the weekend, confirming that all of the contracts involved were newly opened.

By simultaneously buying the January 2012 1-strike puts and selling the January 2012 1-strike calls, this speculator has initiated a synthetic short position on Fannie Mae. The purchase of the long puts will allow the trader to profit from any decline in the share price during the long term.

Meanwhile, the sale of the short calls places this speculator at risk of swallowing heavy losses should FNM rally. If the stock climbs and his calls are assigned, he'll be on the hook to deliver 100 shares per contract at $1 apiece, regardless of what the equity's actual market price might be at the time.

In other words, this option spread effectively mimics the risk/reward profile of a short stock position, without the trader having to go through the extra step of borrowing the shares. (However, unless these calls are hedged by a sufficient amount of FNM stock, the options player will need to maintain a healthy dollar amount in his margin account.)...MORE

"Fannie, AIG Jump: Short Sale Ban?" (AIG; C; FNM; FRE)

Take out the papers and the trash
Or you don't get no spendin' cash...

UPDATE II: "Federal regulators debunk rumors of short-selling ban" (AIG; C; FNM; FRE)"
UPDATE: "Citigroup: ‘Shares no Longer Toxic?’ and Smart Money Buying?" (C; AIG; FNM; FRE)"
Original post:
From Barron's Stocks to Watch Today blog:

It’s beaten-down Ward of the State day, as shares of Fannie Mae (FNM), Freddie Mac (FRE), American International Group (AIG), among firms with substantial government involvement, are lifting on a rumor spreading among traders that the government may take steps to limit short selling in shares of stocks in which it holds a stake.

Fannie shares are up 8 cents, or 8%, at $1.09, Freddie is up 11 cents, or 9%, at $1.30, AIG is up $3.50, or 12%, at $32.60, and Citigroup (C) is up 24 cents, or 7%, at $3.80.

According to one source I’ve spoken to, who was dining at lunch with financial types, although the rumor has boosted confidence in the names but seems to have little to substantiate it.

Look out below?

The writer Tiernan Ray used to help out at Tech Trader Daily, now it looks like he's running the show at STWT.

Here's more detail from Bloomberg via BusinessWeek:

AIG, Citigroup, Fannie Mae, Freddie Mac Shares Surge (Update1)

American International Group Inc. surged, leading gains by financial companies bailed out by the U.S. government, on speculation the insurer will sell more assets after raising $51 billion through deals.

AIG jumped 14 percent to $33.16 at 2:43 p.m. in New York. Citigroup Inc. advanced 7.6 percent to $3.83 as Charles Gasparino of Fox Business said the U.S. may sell its stake in the bank within three months, without saying where he got the information. Fannie Mae climbed 11 percent to $1.12, and Freddie Mac increased 12 percent to $1.33.

“You don’t know what the government might do across the board, good or bad,” said Anton Schutz, who manages $225 million of financial stocks at Mendon Capital Advisors Corp. in Rochester, New York. “And anybody who chooses to short these things can really get squeezed.”

The government saved AIG, Citigroup, Fannie Mae and Freddie Mac after Lehman Brothers Holdings Inc.’s collapse intensified the credit crisis in September 2008. AIG has agreed to sell two divisions this year as it seeks to repay the U.S. Citigroup has repaid some of assistance it received, and the government plans to sell its remaining stake in the next year. President Barack Obama has said his administration is still trying to sort out what to do with Fannie Mae and Freddie Mac.

Short Selling

Short sellers closing their bearish bets may also be driving up the stocks. For AIG, 26 percent of its shares available for trading were sold short as of Feb. 12, according to data compiled by Bloomberg. If it were still in the Standard & Poor’s 500 Index, it would be the third most-shorted among the measure’s 500 companies. With Fannie Mae and Freddie Mac, short sales comprise more than 11 percent of their float. The ratio is 2 percent at Citigroup....MORE

KBW says Fannie, Freddie common shares worthless (FRE; FNM)

Update II: "Fannie's And Freddie's Last Man Standing (FRE; FNM)"
Update: HERE.
Original post:
From MarketWatch:

Analysts at Keefe, Bruyette & Woods on Monday said the common shares of Fannie Mae and Freddie Mac are likely worthless even if the troubled mortgage-finance giants end up being recapitalized by the banking industry.

KBW analysts led by Bose George downgraded shares of Fannie Mae (FNM 1.23, -0.23, -15.75%) and Freddie Mac (FRE 1.50, -0.22, -12.79%) to underperform from market perform and cut their price target on both stocks to zero from $1.

"In order for the government-sponsored entities to survive going forward, we believe they need to be recapitalized through investments from the banks that benefit from their role in the secondary market," KBW wrote in a research note.

"In this scenario, both the common and preferred equity of the GSEs should be worthless," they said, adding that since being put into receivership last summer, the U.S. has put $98 billion of capital into Fannie and Freddie.

Shares of Fannie and Freddie were down more than 10% in early trading. Spokespersons for both firms didn't immediately return calls for comment on Monday morning.

"Fannie Mae and Freddie Mac have been at the heart of the U.S. housing boom, bust and recovery," KBW said. "As the mortgage market moves away from crisis mode, the future of the GSEs has to be addressed.">>>MORE

"Freddie and Fannie Bulls Are Back" and "Optimistic Traders Add New In-the-Money Calls on Freddie Mac" (FNM; FRE)

UPDATE: "Big Decision Looms on Fannie, Freddie (FNM; FRE)"
Original post:
We saw the uptick yesterday but moved on to something else. Today the stock is up another 15 cents, to $1.59.
From Schaeffer's Research:

Call volume has ramped up to 16 times the norm today on Freddie Mac (FRE), after a Bloomberg report suggested that the mortgage lender's regulator, the Federal Housing Finance Agency, might request additional aid from the U.S. Treasury. Roughly 5,231 call contracts have crossed the tape so far, and speculators are setting their sights on the stock's in-the-money December 1 call.

So far, a total of 2,535 contracts have traded on FRE's December 1 call, with 99% changing hands at the ask price. With only 1,326 contracts in open interest at this strike, it seems safe to say that traders are adding new bullish bets at the December 1 call today....MORE

And from The Street.com:

Fannie Mae (FNM Quote)and Freddie Mac(FRE Quote) shares are surging again as speculators refuse to give up on the idea that the giant housing lenders' shares might be worth something....MORE

"U.S. House GOP calls for Fannie, Freddie phase out" (FNM; FRE)

Update 3/23: "Bloomberg: "Geithner Urges Ending Fannie, Freddie ‘Ambiguity’ " (FNM; FRE)"'
Original post:
From Reuters:

Republicans in the U.S. House of Representatives on Friday recommended the country's top two mortgage finance companies, the recipients of a massive government bailout during the height of the financial crisis, be phased out in four years in order to restore stability to the housing market.

The House Republicans offered five goals to guide the overhaul of Fannie Mae (FNM.N) and Freddie Mac (FRE.N), which were chartered by Congress with a mandate to provide liquidity to the U.S. housing market but are privately held by shareholders. The goals include reestablishing a housing finance market in which private capital is the primary source of mortgage financing.

The lawmakers put forward 10 principles, among them winding down Fannie Mae and Freddie Mac and cutting their mortgage portfolio holdings by 25 percent a year over four years.

"It is time to deal with bailed-out companies, which were at the center of the mortgage market meltdown that caused the financial crisis and have cost taxpayers hundreds of billions of dollars," said Representative Spencer Bachus, an Alabama Republican, and ranking member of the House Financial Services Committee.

The committee, chaired by Representative Barney Frank, a Massachusetts Democrat, is to hold a hearing on the future of housing finance on Tuesday.

In an interview on CNBC on Friday, Frank said the mortgage finance firms needed restructuring because the partially public, partially private "hybrid" was not workable.

"We made a mistake -- not me, I wasn't there when it was enacted but we helped perpetuate it -- setting up Fannie Mae and Freddie Mac as hybrids," he said.

"They were private shareholder corporations with a need to make a profit but they were also given this public mandate. That worked well when everything was doing fine, but when things got bad it wasn't working well," Frank added.

U.S. Treasury Secretary Timothy Geithner will testify and is expected to offer broad thoughts on how the role of Fannie Mae and Freddie Mac should change....MORE

Tuesday's hearing agenda:

Housing Finance-What Should the New System Be Able to Do?: Part I-Government and Stakeholder Perspectives
	10:00 a.m., Tuesday, March 23, 2010, 2128 Rayburn House Office Building Full Committee
Click here to watch live webcast of this hearing.
	Witness List & Prepared Testimony: Panel One: The Honorable Timothy F. Geithner, Secretary, U.S. Department of the Treasury Panel Two: Ms. Sarah Rosen Wartell, Executive Vice President, Center for American Progress Mr. Michael Berman, President and Chief Executive Officer, CWCapital, on behalf of Mortgage Bankers Association Mr. Mark A. Calabria, Ph.D., Director, Financial Regulation Studies, Cato Institute Mr. Vincent O’Donnell, Vice President, Affordable Housing Preservation Initiative, Local Initiatives Support Corporation (LISC) Mr. Robert E. DeWitt, President, Chief Executive Officer, and Vice Chairman, GID Investment Advisers LLC, on behalf of National Multi-Housing Council Ms. Janis Bowdler, Deputy Director, Wealth-Building Policy Project, National Council of La Raza Mr. Anthony Sanders, Distinguished Professor of Real Estate Finance, School of Management, George Mason University Mr. Vince Malta, Vice President and Liaison to Government Affairs, National Association of Realtors Available Member Statements: Printed Hearing: The printed version of this hearing will be posted as soon as it is available. Related Documents: Panel One: