AGM--
Tuesday May 28, 6:07 pm Eastern Time
SmartMoney.com - One-Day Wonder
Big Mac Attack
By Lawrence Carrel
Farmer Mac (NYSE:AGM - News)
Share price as of Friday's close: $33.89
Share price now: $30.00
daily average 198,100 shares
Last time this low: Sept. 24, 2001
FOR THE PAST few years, a coterie of critics has railed against alleged abuses at Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News), without garnering much attention in mainstream investing circles. But when one well-known media outlet raised some serious questions about Farmer Mac (NYSE:AGM - News), the country cousin of those two better-known government-sponsored entities, investors took notice.
On Tuesday, the New York Times published a second article questioning Farmer Mac's financial health and the unusual role of its board. The company's stock quickly plunged 11.5%.
Formally known as the Federal Agricultural Mortgage Corporation, the Washington-based Farmer Mac was founded in 1988 as part of a farm-industry bailout. Its original mandate was to buy agricultural loans and repackage them into tradable securities, greasing the wheels of the agricultural-lending business just as Fannie Mae and Freddie Mac do in the mortgage business. But this quickly proved to be a money-losing proposition, and in 1996 Farmer Mac convinced Congress to loosen the rules. Since then, Farmer Mac has moved into riskier nonfarm investments, such as preferred stocks, bonds and other securities. On April 28, the Times reported that Farmer Mac has 45% of its assets in these noncore investments, a much greater amount than Freddie Mac or Fannie Mae. The Times characterized the company's health as "somewhat dicey" and said it "operates with the barest of financial cushions beyond standards set by regulators."
On Tuesday, the Times reported that dissenters on the company's board are often removed rather than heeded, creating a "board that serves management, rather than the other way around." It also reported that Farmer Mac's reserves of $17 million "have grown far slower than the $2.5 billion in [its] off-balance-sheet guarantees, potentially leaving taxpayers on the hook if the money cannot be paid."
Critics, including Federal Reserve Chairman Alan Greenspan, have warned of the systemic risks posed when the public sector underwrites business activities that mainly benefit the private sector. While they concede that Fannie Mae and Freddie Mac have helped lenders and borrowers by packaging loans into securities and making a market for trading them, the Times noted that Farmer Mac has yet to create a thriving secondary market for agricultural loans.
In some ways, Tuesday's sell-off was poetic justice. Last Friday, Farmer Mac requested that the New York Stock Exchange investigate unusual trading activity in its stock. Farmer Mac blamed "the aberrational, and possibly improper, trading activities of short sellers" for the 32% drop in its stock since the Times' first report in April. Jerry Oslick, Farmer Mac's general counsel, said the short-selling activity was "orchestrated with recent publications of materially misleading assertions regarding the company's financial condition."
"We are confident of the completeness, fairness and accuracy of our reporting," says New York Times spokeswoman Catherine Mathis.
Quote:
The two analysts covering the company couldn't be reached Tuesday. But in an April 29 research report, UBS Warburg analyst Gary Gordon wrote that the April 28 New York Times article "contains a number of misstatements in our view.... The article mentions that AGM has only a $15.9 million loss reserve. That in fact represents nearly five times its current annual loss rate. And AGM's average loan-to-value ratio is 49%, suggesting a substantial cushion against farm industry problems." Gordon reiterated his Strong Buy rating on the stock, and said sell-offs would create attractive buying opportunities. Gordon or a family member owns shares of Farmer Mac; UBS Warburg has an investment-banking relationship with the company. |
