Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
What can I say about Fannie Mae (NYSE: FNM ) , a company so broke that even its uncle wouldn't lend it money? Oh, wait, that's right: Fannie's Uncle Sam is lending her boatloads of your tax dollars, because he's scared of upsetting the mortgage market. The only way to avoid doing that is for the U.S. Treasury to buy mortgages from Fannie and cousin Freddie Mac (NYSE: FRE ) at rates that Bank of America (NYSE: BAC ) and Wells Fargo (NYSE: WFC ) will not tolerate for the risk involved in residential real estate.
So Fannie has to take on mortgages at what I consider to be government-manipulated low rates and then sell them to investors as mortgage-backed securities. And Fannie hasn't come close to paying out on all the losses for its pre-crisis mistakes on mortgage-backed securities guarantees that are still coming home to roost. Current loss reserves total $65 billion, versus non-performing loans of $197 billion. That's a pretty good indication that there will be billions of dollars more in loss-reserve increases in the coming quarters.
Fannie's 2009 third-quarter results illustrate the problem. The company posted an $18.9 billion loss, which followed on a $14.8 billion loss in the second quarter. The net result was a negative $15 billion shareholder equity balance. That's right. The shareholders, other than Uncle Sam, do not own a penny of this company, and this is no accounting magic. To get back to positive shareholder equity, the U.S. Treasury simply increased its preferred equity investment by $15 billion to a total of $60.9 billion.
But Uncle Sam isn't that enamored of Fannie. He's demanding a 10% annual payment on his loan -- that's $6.09 billion in annual payments. Compare this with Fannie's record 2003 total net income of $8 billion, and you see the bind that Fannie is in, even without all those pesky rising loss reserves. Mind you, the interest payments seem astronomically small when compared with the past 12 months' losses of $82 billion. But hey, we like to look forward to the possibility that Fannie will make it out of this mess. And even if it does, it's highly unlikely that current shareholders will be there to benefit.
If that's not enough to scare you off from buying shares, then consider that this company is in conservatorship and is therefore effectively run by the U.S. government. And the U.S. government's motives are not the same as those for equity shareholders like you and me. If it were, then Fannie should be able to charge huge fees for its guarantees on mortgage-backed securities that could conceivably cover the risk and make a tidy profit. After all, Fannie and Freddie are virtually the only game in town, since no one can compete against the U.S. government -- certainly not the likes of Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) . But the government's aim is to maintain the cheap mortgage environment, and to do that, those guarantee fees just can't be allowed to go to an economic level.
Foolish bottom line
Don't be suckered into thinking that Fannie's shares are cheap because they go for a little more than $1 a stub. It doesn't matter if you have 1,000 $1 shares or 10 $100 shares -- you still have $1,000 invested. Fannie is bankrupt, and it's only the U.S. government that's keeping it on life support. Even if the feds don't pull the plug for political reasons, there is not likely to be any sympathy -- or any cash -- for shareholders.
What do you think is the worst stock for 2010? See the rest of our contenders and cast your vote!