Fannie Mae: Too big to sell?
Under the provocative headline “Wall Street Is Stuck With Fannie Mae,” the
As the stock skidded, investors unloaded 35 million shares, driving the stock to its lowest price since the summer of 2000. After a 75-cent gain Friday, the stock closed at $57.70 a share, off almost 19 percent since the first of the year.
All the way down, Fannie Mae’s defenders kept insisting that the problems at the District-based mortgage funding company are in the past, that the stock has fallen too far but soon will bounce back to $80 or even $90 a share.
In their dreams.
“I bought the stock and I feel happy!“
Are you suggesting, sir, that brokers and analysts are not reliable?
Wall Street analysts can’t afford to admit they’re wrong about Fannie’s prospects. They have urged too many people and institutions to buy the stock for them to cut off that limb now.
Wall Street firms make too much money dealing in mortgage securities issued by Fannie Mae to do anything that would hurt Fannie or endanger their business relationship.
And Wall Street has too much of its own money invested in Fannie to put out a “sell” recommendation on Fannie Mae. If the big firms sold their holdings before telling clients to do so, the Securities and Exchange Commission would be all over them. If they told clients to sell before selling their own holdings, they’d hurt themselves.
All this is pretty damning stuff, but author Knight is just warming up:
Nobody wants to be the one who starts a run to dump Fannie Mae stock. But nobody wants to be the one left holding the bag.
And he infers that major institutions have been quietly unloading the stock:
While Citigroup and several other Wall Street firms and mutual fund managers have been buying Fannie stock, the stock’s performance makes it clear that other big institutional investors have been bailing out.
Eighty-five percent of Fannie’s shares are held by institutions.
Exactly who’s been selling, however, won’t be known until April, when mutual funds report what stocks they bought and sold in the first quarter.
Indeed, a brief air pocket of clarity from Alan Greenspan seems also not to have helped:
Federal Reserve Chairman Alan Greenspan triggered a second round of selling by suggesting at a congressional hearing Feb. 17 that the federal government ought to restrict the growth of Fannie Mae and Freddie Mac.
“You think I know where the stock price is going?”
Much though the market devalues earnings volatility, it hates uncertainty:
But it’s hard to argue with the cautionary outlook offered by truly independent analysts, such as Josh Rosner of Medley Global Advisors, a specialized research firm with offices in
“The market is not properly acknowledging or discounting the problems” at Fannie Mae and Freddie Mac, Rosner said. And by “discounting the problems” he means marking down Fannie’s stock to account for them, not dismissing the problems.
Rosner said it’s a “hopeless task” to evaluate Fannie’s stock in light of the regulatory and legislative problems ahead. Like many analysts, he assumes that Congress will pass legislation this year to create a new federal regulatory agency to oversee the two mortgage giants. Fannie killed that bill last year, but odds are that it will pass this time, perhaps in more punitive form, and perhaps incorporating Greenspan’s idea to limit Fannie’s and Freddie’s growth.
If the legislation passes as written, it would take two years or more to get a new agency off the ground, so Fannie and Freddie face continuing battles with their present regulator, the Office of Federal Housing Enterprise Oversight, and ongoing investigations by the Securities and Exchange Commission and others.
It’s not immediately clear to me that taxpayers have a vested interest in the heights to which Fannie Mae’s stock price may soar, or the depths to which it may plummet. Taxpayers and housers do care about the GSEs’ viability, their financial safety and soundness, their fulfillment of affordable housing goals, the benefits they deliver to affordable housing, and the efficiency with which they convert their advantages into housing affordability. All of these, it seems to me, are effectively served by GSEs that make earnings –– the priceat which those earnings multiply is not the government’s concern, even if it is discernible:
There is simply no way of knowing whether there are more skeletons to come out of the closet.
Fannie still faces the formidable job, ordered by regulators, of redoing all its financial reports for the past three years. The restatement is expected to result in a $9 billion write-off. Wall Street regards that as simply an accounting change, but Rosner cautions that new accounting, by new auditors, could reveal more losses.
The case for buying Fannie Mae’s stock is based on the premise that once the dust settles, everything is going to be all right.
Rosner doesn’t buy that. “What comes after the dust settles,” he said, “is more dust.”
“Mr. Greenspan, what do you think of the GSEs?”
