Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Price Drops Amid Stimulus and Poor Data - 21st Jan 21
Protecting the Vulnerable 2021 - 21st Jan 21
How To Play The Next Stage Of The Marijuana Boom - 21st Jan 21
UK Schools Lockdown 2021 Covid Education Crisis - Home Learning Routine - 21st Jan 21
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Investors Hit by Fannie/Freddie “Rescue” Plan

Companies / Credit Crisis 2008 Sep 09, 2008 - 05:42 AM GMT

By: Money_Morning


Keith Fitz-Gerald writes: Many of the largest financial institutions - including banks, insurance companies and mutual funds - own huge blocks of Fannie Mae ( FNM ) and Freddie Mac ( FRE ) shares.

Still, millions of investors who thought they were "safe" from this whole bailout mess because they didn't own Fannie or Freddie directly might get blindsided anyway. The reason: These investors may have indirect ownership in one or both of the two mortgage miscreants, thanks to shares held in their mutual funds, 401(k) plans, pension funds or annuities.

Let me explain.

Since last year, both Fannie and Freddie have been the focus of much speculation, with analysts figuring the government would take over and "rescue" the beleaguered mortgage giants. As we've reported to you here in Money Morning , most concerns focused on how the government would actually take over the two government sponsored enterprises (GSEs), and whether or not the process would eliminate the common stock and preferred shares of both.

U.S. Treasury Secretary Henry M. Paulson & Co. ended the betting on that issue on Sunday, announcing that neither class of stock will be eliminated, as some had feared - although the point may be moot. Especially since a "rescue" is not going to stop the meltdown of the nation's $12 trillion mortgage market (in which about half the paper is backed by Fannie and Freddie, incidentally).

As part of the government's plan, shareholders have been stripped of both their corporate-governance powers and management rights, while both common and preferred shareholders saw their income eliminated when the government ended dividend payments to both.

This could lead to serious - and perhaps irreparable - declines in the portfolios of a number of regional banks, mutual funds and major insurance companies, which used holdings in both companies to shore up assets by virtue of the stability they offered and the income they provided.

The list of "at risk" names is as distinguished and it is long.

Some, like longtime superstar fund manager William "Bill" Miller of Legg Mason Inc. ( LM ) fame, were no doubt shell-shocked yesterday (Monday). And with good reason. Fannie's shares dropped another 81.38% yesterday, while Freddie's were down an additional 82.75%. All told, both stocks are down 99% from their respective 52-week highs.

Miller - an avowed value investor - displayed real brilliance in his ahead-of-the-crowd decoding of the business models of, and inherent value in, such New Economy stalwarts as ( AMZN ) and direct seller Dell Inc. ( DELL ). And he's best known for beating the Standard & Poor's 500 Index for 15 straight years - the mutual fund sector's version of Cal Ripken Jr.'s "Streak." But Miller's streak ended in 2006 and he's yet to regain his former momentum. Bets like those he placed on Freddie can't help.

At a time when Fannie and Freddie have lost most of their value, most institutional investors have been net sellers or active hedgers, at the least. We don't know whether Miller hedged his bets; we only know that he bet big.

According to a report, Legg Mason owned 15 million Freddie Mac shares at the end of 2007 , when the stock was trading at $34 a share. Legg's holdings climbed to 50 million shares in the first quarter, a point at which the fallout from the Bear Stearns collapse had helped push Freddie's shares down into the teens. As of July 31, when the Freddie Mac's shares were trading at less then $10 each, Legg and Miller actually held 80 million shares of the mortgage GSE.

In other words, Miller's been doubling down - and in a big way. And the bill has now come due. As of Dec. 31, 2007, Legg Mason held paper worth a cool $1.7 billion. As of yesterday, it's worth less than $53 million. And we're not even counting the losses on any shares he's picked up since then. It's going to be hard for him to argue to his shareholders that this is anything more than an unmitigated disaster.

Of course, we hope he's engaged in systematic hedging along the way - a question we won't be able to answer until the next set of quarterly reports come out. We'll want to know - as will scores of investors who thought they'd escaped this catastrophe.

Unfortunately, the story is much the same at a whole host of other institutions, including AllianceBernstein Holding LP ( AB ), Capital Research Global Investors , Fidelity Investments , Citigroup Inc. ( C ), Lord, Abbett & Co ., and Barclays Global Investors Ltd. (ADR: BCS ), for example. According to MSN, they were not only net long Fannie, as of June 30th, but each firm added net positions during the second quarter while the prices were tanking.

And insurance companies. According to reports in Fortune magazine yesterday, Genworth Financial Inc. ( GNW ) and MetLife Inc. ( MET ), among others, own large preferred share positions that have just effectively been wiped from the face of the earth. And The Associated Press reported that a number of regional banks - such as Sovereign Bancorp Inc. ( SOV ) - will take a hit because of their holdings of GSE preferred stock.

So, the bottom line here is that last weekend's so-called "rescue" is really nothing more than the government playing " pass the hat ."

None of the stories I've seen reference exactly where all this money for the rescue is coming from. Which makes the whole rescue concept more than a little suspect.

The real question at the end of the day is one that my good friend - author and financial columnist Jon Markman - posed to me over the weekend:

Will domestic spending increase as a result of the Fannie/Freddie bailout and does this increase gross domestic product (GDP) in any way shape or form?

I think not.

Which once again leaves regular taxpayers like you and me on the hook for an open-ended bar tab that we don't have the power to shut down.

[ Editor's Note : In Part II tomorrow (Wednesday), Contributing Editor Martin Hutchinson looks at ways for investors to capitalize on the fallout from the Fannie/Freddie Bailout.]

News and Related Story Links :

By Keith Fitz-Gerald
Investment Director

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules