Fannie, Freddie Fall as Barron's Says Bailout Likely (Update2)
By Dawn Kopecki
Aug. 18 (Bloomberg) -- Fannie Mae and Freddie Mac fell to almost 18-year lows in New York trading on concern the government will be forced to bail out the mortgage-finance companies, wiping out common stockholders.
Both Fannie and Freddie slid as much as 12 percent after Barron's said government officials anticipate the companies will fail to raise the equity capital they need, prompting the U.S. Treasury to step in. Fannie is down 82 percent this year. Freddie has fallen 85 percent.
``It is very, very likely to happen before the end of the third quarter,'' Ajay Rajadhyaksha, the head of fixed income strategy for Barclays Capital Inc., said in an interview. ``Without government help, we think there is very little chance of Freddie completing a significant capital raising.''
A rescue would include preferred stock with a seniority, dividend preference and convertibility right that would wipe out common stockholders, Barron's reported, citing an unidentified source in the Bush administration. Treasury Secretary Henry Paulson, who received the authority he requested from Congress to help the companies, has said a bailout won't be needed.
``We aren't going to comment on speculation,'' said a Treasury spokeswoman, Jennifer Zuccarelli. ``As the Secretary has said, we have no plans to use these authorities.''
Fannie Mae was down 86 cents, or 11 percent, to $7.05, at 10:19 a.m. in New York Stock Exchange composite trading. Freddie fell 63 cents, or 11 percent, to $5.22.
A spokeswoman for McLean, Virginia-based Freddie, Sharon McHale, wasn't immediately available. Brian Faith, a spokesman for Washington-based Fannie wouldn't comment immediately.
Housing Slump
The companies, which own or guarantee 42 percent of the $12 trillion in U.S. home loans outstanding, have been battered by record delinquencies and rising losses amid the worst housing slump since the Great Depression. Both companies slashed their dividends this month and announced plans to slow growth after posting bigger-than-expected losses for the second quarter.
Freddie Chief Executive Officer Richard Syron said on Aug. 6 that the U.S. housing market is still ``searching for a bottom'' and that most of the company's expected losses have yet to be realized. Home prices still have 7 percent to 9 percent more to fall, bringing the total decline to as much as 28 percent since peaking in late 2006, Freddie estimated.
The U.S. mortgage delinquency rate has set a record every quarter since March 2007 while the rate of late payers going into foreclosure is also at an all-time high, Freddie said.
Standard & Poor's cut Fannie and Freddie's preferred stock and subordinated debt ratings by three levels last week to A- from AA-. S&P affirmed the companies' AAA senior debt rating, reflecting perceived government support.
Short Selling
A rule that made it harder for investors to bet against Fannie and Freddie's shares also expired last week. The Securities and Exchange Commission on July 21 imposed a temporary order that tightened rules for 19 stocks, including Fannie and Freddie, prohibiting firms from so-called naked short selling, where they sell shares without actually borrowing them.
President George W. Bush signed a broad housing bill into law July 30 that toughened the companies' oversight while also giving Paulson authority to buy an unlimited amount of the companies' shares, debt or mortgage-backed securities if needed.
Though the Bush administration was looking to Fannie and Freddie to turn around the U.S. housing market and avert a recession, former Federal Reserve Governor Susan Bies said, ``they really are helping to pull the market down rather than being source of strength at this time.''
``They are going to be pressed to raised capital in a very weak market, which is going to make the cost of capital very high for both of these organizations,'' Bies said in a recent interview on Bloomberg.
Credit-Default Swaps
The cost to protect the subordinated debt of Fannie Mae and Freddie Mac from default climbed to a record. Credit-default swaps on Fannie's subordinated debt increased 18 basis points to 296 basis points, while contracts on Freddie Mac jumped 23 basis points to 300, according to CMA Datavision.
Contracts on the senior debt of the two companies were little changed, with Freddie Mac increasing 1 basis point to 50 basis points and Fannie unchanged at 49 basis points, CMA prices show. The gap between the credit-default swaps on the senior and subordinated debt is the widest ever.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements. |
