Why Fannie Mae and Freddie Mac Are Down 10% Today

KBW analysts throw cold water on the bull thesis for Fannie and Freddie common stock. Preferred shareholders hang on.

Jordan Wathen
Jordan Wathen
Dec 5, 2016 at 4:20PM
Financials

Image source: Getty Images.

What's happening?

The shares of Fannie Mae (NASDAQOTH:FNMA) and Freddie Mac (NASDAQOTH:FMCC) are each down by about 10% as of 2:30 p.m. EST.

So what?

The excitement about Donald Trump's selection of Steven Mnuchin for Treasury Secretary appears to be short-lived. Mnuchin indicated in an interview with Fox Business Network that he wants to "get them out of government control," referring to Fannie Mae and Freddie Mac.

Investors took the commentary to mean that Mnuchin would allow the government-sponsored entities (GSEs) to start returning their profits to private shareholders rather than having the profits swept by the U.S. Treasury.

Keefe, Bruyette & Woods (KBW) analysts Bose George and Eric Hagen weighed in on Tuesday, opining that the upside for Fannie Mae and Freddie Mac was minimal in privatization. Despite Mnuchin's favorable stance, they wrote in a report that they "continue to believe that the most likely scenario is one in which the common shares have no value." KBW's price target for both GSEs is $1 per share.

Now what

In its best-case scenario for privatization, KBW's report says that, "the capital need will meaningfully dilute the value of the common shares, suggesting little upside from current levels" -- implying that raising capital would impair the valuation of Fannie and Freddie common stock.

It's telling that the preferred shares of the GSEs are down by about 3%-4%, depending on the series, in active trading today. KBW's commentary may have spooked owners of the common stock, but holders of the preferred stock aren't so willing to throw in the towel on the privatization thesis.