Well, here we are. Week three of what might go down as some of the darkest days in the American housing market. The good news is that Fannie Mae
Welcome to America
American investors aren't the only ones feeling the heat of the mortgage meltdown. More than $1.5 trillion, or about 20%, of Fannie and Freddie securities were held by foreign investors as of the end of March. The lure of these securities over the years was simple: Since Fan and Fred were backed by the U.S. government, at least in theory, you needn't even mutter the words "credit risk." But what if the government decided not to come through on its implicit pledge? Oh, claptrap. Just shut up and buy, would you?
Well, as the day of reckoning draws closer, rest assured that our deep-pocketed friends abroad will be watching any developments very closely. To a greater degree than most people will admit, foreign participation in our markets is keeping the American engine running. Any large-scale fallout from Freddie and Fannie would likely zap confidence among foreign capital, which could cause interest rates to surge and pummel the dollar into submission. Oh, the joys of globalizing your debt.
Here comes the flood
Of course, any need for government intervention could be detoured if the two could stay afloat on their own terms. This is the most probable outcome, in my opinion. But before you pop the champagne corks and dive back into these battered stocks, know that what you'll get tomorrow might be a pittance of what you'll pay today.
Freddie is considering raising as much as $10 billion, in a stock sale that would dilute the pants off current investors. How much dilution would occur? We're talking about adding around 1 billion shares to the total count -- on top of the 645 million or so currently outstanding. Yes, raising capital can stave off a looming collapse, but it isn't a fix-all solution for shareholders. Just ask the folks at Washington Mutual
But what if ...
Of course, if last week's gains prove to be nothing more than a suckers' rally, and Fan and Fred require a bailout, it won't be a cheap one. On Wednesday, the President backed off his threat to veto legislation that could insure as much as $300 billion of refinanced mortgages. The bill also gives the Treasury Department the power to purchase equity and lend to Freddie and Fannie. The Congressional Budget Office estimates that a rescue would cost in the neighborhood of $25 billion, but it could be as high as $100 billion. Who would pay that money? Taxpayers like you.
The Budget Office did note that there was at least a 50% chance the government wouldn't have to intervene. Phew! Meanwhile, my inner mathematician would like to remind you that there could be as much as a 50% chance that Uncle Sam will need to step in. Half full, half empty ... whatever.
Where to now?
Both Fannie and Freddie have more than doubled since bottoming out last week. Kudos to them. Unfortunately, it's likely we'll be hearing about these two wayward government-backed companies for some time to come.
For more Fannie and Freddie news, check out:
- Why one high-profile investor thinks shareholders should be completely wiped out.
- Why Fannie and Freddie were doomed from the beginning.
- Do you own garbage stocks? You're not alone.
