AI
Monday, July 07, 2008 9:40:03 PM
Fannie Mae and Freddie Mac Shares Plunge
By CHARLES DUHIGG
Published: July 8, 2008
As home prices decline and Washington struggles to end the economic malaise, Wall Street is starting to send a sobering message: The worst is yet to come.
Fannie Mae | Freddie MacOne of the strongest warning signs came Monday, when shares of the nation’s most important mortgage companies, Fannie Mae and Freddie Mac, plummeted. After falling almost continuously over the past month, in just one day Freddie Mac tumbled another 18 percent, and Fannie Mae lost 16 percent amid concerns that the companies would need to raise billions of dollars in fresh capital.
Fannie Mae and Freddie Mac are the nation’s largest buyers of home mortgages, and traditionally the government’s backstop for the housing economy. But with Monday’s plunge, each of these giants has now lost more than 60 percent of its market value this year. The declines, along with a falling stock market and growing unease about the possibility of more red ink at big banks, reflect a growing conviction consensus among investors that the current housing slump will last longer, and prove more severe, than initially feared.
As a result, investors are signaling that they are far from convinced that any enterprise — even ones with the strongest backing — can successfully navigate these choppy waters, and that those who do survive will pay dearly.
“Everything points to a lot more bad news to come,” said Paul Miller of the Friedman, Billings, Ramsey Group in Arlington, Va. “If Fannie and Freddie are vulnerable, it means no one is absolutely safe.”
Representatives of Freddie Mac and Fannie Mae declined to comment on their stocks’ performances on Monday. Freddie Mac closed at $11.91, the company’s lowest price since 1994. Fannie fell $28.16, its lowest level since 1992.
The stocks’ dips were part of a broad decline in financial shares. Shares of Bank of America and JPMorgan Chase fell more than 3 percent, and the Dow Jones industrial average ended a tumultuous day down half a percent.
The decline in Freddie Mac and Fannie Mae comes at a delicate time for the financial markets. In coming weeks, many of the nation’s largest financial institutions — including Citigroup and Merrill Lynch — will report results that investors worry will be disappointing. Lehman Brothers, which some on Wall Street worry might run into trouble similar to that at Bear Stearns, continues to struggle to restore confidence among investors. Lehman’s share price fell almost 8 percent on Monday.
If banks’ results are as gloomy as anticipated, the news could depress other sectors of the stock market and further sap consumer confidence, which is already battered by rising oil costs, mounting credit card defaults and prices that are rising because of spiraling energy costs and a weakening dollar.
Worldwide, banks and brokerages have written down the value of the assets they hold, notably those linked to mortgages, by more than $400 billion since the beginning of last year. In April, the International Monetary Fund said total losses for banks, insurance companies and investment funds may reach $945 billion, and some forecasters say the bill could be even higher.
“The economic story has gotten worse and worse and worse, and every financial institution seems like it’s in freefall,” said Steven D. Persky, chief executive at Dalton Investments in Los Angeles, which manages about $1 billion. “It’s not clear at all when this ends.”
The gloomy news also threatens to further shrink Washington’s influence has over the economy. Legislators are widely expected to approve a housing rescue bill by the end of the month. That legislation will overhaul the regulatory structure for Freddie Mac and Fannie Mae, which are government chartered enterprises, and will force the two companies to hand over hundreds of millions of dollars each year to refinance troubled home loans.
But the reform legislation will also likely bolster the odds that taxpayers will foot the bill if either company falters.
“If Fannie or Freddie ever became critically undercapitalized, their regulator would have no choice but to put in place a taxpayer rescue,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company.
To ward off that possibility, in recent weeks Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. have both urged Freddie Mac and Fannie Mae to raise additional capital from investors.
But as share prices at the companies have declined, raising new funds has become increasingly difficult. Freddie Mac, for instance, announced on May 14 that it intended to sell $2.75 billion in new common stock to investors. Since then, the company’s stock price has declined by 56 percent.
As a result, Freddie Mac will have to issue more than twice as many shares to raise the new funds. When those new shares hit the market, they are likely to further push the company’s stock price down, and make it even harder for Freddie Mac to recover when the market eventually rebounds.
Similar problems are likely to plague investment banks and other financial firms also hoping to raise new money. So, as the housing market declines, there are new concerns that the financial spigot that keeps Wall Street and the economy afloat may be closing.
It is unclear precisely why Fannie Mae and Freddie Mac suffered so greatly on Monday. Early in the day, analysts at Lehman Brothers estimated that a proposed change in accounting rules would require the companies to raise about $75 billion in additional capital — an enormous sum for two firms that have already asked investors for $25 billion since last December.
But other analysts disputed Lehman’s conclusions, and even the Lehman report predicted the proposed rule changes would not be enacted, or that the two mortgage companies would be exempt.
Additionally, Freddie Mac and Fannie Mae were battered by news on Monday that their cost of borrowing, when compared to what the government pays, had increased to their widest spread since March, when it set a 22-year record. And some analysts raised fears that the companies would suffer from chaos in the private mortgage insurance market, where Fannie Mae and Freddie Mac have sought protections from the risk of borrower defaults.
“These companies, and the economy in general, are fighting a lot of demons right now,” said Sean J. Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. “If things don’t get turned around, you’re going to see more downward pressure on homebuilding, on financial institutions, on spending. There’s not a lot of places that will be protected.”
http://www.nytimes.com/2008/07/08/business/08fannie.html
By CHARLES DUHIGG
Published: July 8, 2008
As home prices decline and Washington struggles to end the economic malaise, Wall Street is starting to send a sobering message: The worst is yet to come.
Fannie Mae | Freddie MacOne of the strongest warning signs came Monday, when shares of the nation’s most important mortgage companies, Fannie Mae and Freddie Mac, plummeted. After falling almost continuously over the past month, in just one day Freddie Mac tumbled another 18 percent, and Fannie Mae lost 16 percent amid concerns that the companies would need to raise billions of dollars in fresh capital.
Fannie Mae and Freddie Mac are the nation’s largest buyers of home mortgages, and traditionally the government’s backstop for the housing economy. But with Monday’s plunge, each of these giants has now lost more than 60 percent of its market value this year. The declines, along with a falling stock market and growing unease about the possibility of more red ink at big banks, reflect a growing conviction consensus among investors that the current housing slump will last longer, and prove more severe, than initially feared.
As a result, investors are signaling that they are far from convinced that any enterprise — even ones with the strongest backing — can successfully navigate these choppy waters, and that those who do survive will pay dearly.
“Everything points to a lot more bad news to come,” said Paul Miller of the Friedman, Billings, Ramsey Group in Arlington, Va. “If Fannie and Freddie are vulnerable, it means no one is absolutely safe.”
Representatives of Freddie Mac and Fannie Mae declined to comment on their stocks’ performances on Monday. Freddie Mac closed at $11.91, the company’s lowest price since 1994. Fannie fell $28.16, its lowest level since 1992.
The stocks’ dips were part of a broad decline in financial shares. Shares of Bank of America and JPMorgan Chase fell more than 3 percent, and the Dow Jones industrial average ended a tumultuous day down half a percent.
The decline in Freddie Mac and Fannie Mae comes at a delicate time for the financial markets. In coming weeks, many of the nation’s largest financial institutions — including Citigroup and Merrill Lynch — will report results that investors worry will be disappointing. Lehman Brothers, which some on Wall Street worry might run into trouble similar to that at Bear Stearns, continues to struggle to restore confidence among investors. Lehman’s share price fell almost 8 percent on Monday.
If banks’ results are as gloomy as anticipated, the news could depress other sectors of the stock market and further sap consumer confidence, which is already battered by rising oil costs, mounting credit card defaults and prices that are rising because of spiraling energy costs and a weakening dollar.
Worldwide, banks and brokerages have written down the value of the assets they hold, notably those linked to mortgages, by more than $400 billion since the beginning of last year. In April, the International Monetary Fund said total losses for banks, insurance companies and investment funds may reach $945 billion, and some forecasters say the bill could be even higher.
“The economic story has gotten worse and worse and worse, and every financial institution seems like it’s in freefall,” said Steven D. Persky, chief executive at Dalton Investments in Los Angeles, which manages about $1 billion. “It’s not clear at all when this ends.”
The gloomy news also threatens to further shrink Washington’s influence has over the economy. Legislators are widely expected to approve a housing rescue bill by the end of the month. That legislation will overhaul the regulatory structure for Freddie Mac and Fannie Mae, which are government chartered enterprises, and will force the two companies to hand over hundreds of millions of dollars each year to refinance troubled home loans.
But the reform legislation will also likely bolster the odds that taxpayers will foot the bill if either company falters.
“If Fannie or Freddie ever became critically undercapitalized, their regulator would have no choice but to put in place a taxpayer rescue,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company.
To ward off that possibility, in recent weeks Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. have both urged Freddie Mac and Fannie Mae to raise additional capital from investors.
But as share prices at the companies have declined, raising new funds has become increasingly difficult. Freddie Mac, for instance, announced on May 14 that it intended to sell $2.75 billion in new common stock to investors. Since then, the company’s stock price has declined by 56 percent.
As a result, Freddie Mac will have to issue more than twice as many shares to raise the new funds. When those new shares hit the market, they are likely to further push the company’s stock price down, and make it even harder for Freddie Mac to recover when the market eventually rebounds.
Similar problems are likely to plague investment banks and other financial firms also hoping to raise new money. So, as the housing market declines, there are new concerns that the financial spigot that keeps Wall Street and the economy afloat may be closing.
It is unclear precisely why Fannie Mae and Freddie Mac suffered so greatly on Monday. Early in the day, analysts at Lehman Brothers estimated that a proposed change in accounting rules would require the companies to raise about $75 billion in additional capital — an enormous sum for two firms that have already asked investors for $25 billion since last December.
But other analysts disputed Lehman’s conclusions, and even the Lehman report predicted the proposed rule changes would not be enacted, or that the two mortgage companies would be exempt.
Additionally, Freddie Mac and Fannie Mae were battered by news on Monday that their cost of borrowing, when compared to what the government pays, had increased to their widest spread since March, when it set a 22-year record. And some analysts raised fears that the companies would suffer from chaos in the private mortgage insurance market, where Fannie Mae and Freddie Mac have sought protections from the risk of borrower defaults.
“These companies, and the economy in general, are fighting a lot of demons right now,” said Sean J. Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. “If things don’t get turned around, you’re going to see more downward pressure on homebuilding, on financial institutions, on spending. There’s not a lot of places that will be protected.”
http://www.nytimes.com/2008/07/08/business/08fannie.html
Solar Stocks #board-11148
Peak Oil #board-6609
Coal #board-2809
Real Estate Bubble #board-7285
Lender Implosion #board-10076
HomeBuilders #board-1680
Your Economy #board-1948
Global Warming #board-11877
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