Tuesday, August 19, 2008

GSE Preferreds: I don't believe it!

Fannie Mae and Freddie Mac preferred stocks rose ~$3 in the last hour of trading. Yes you read that right. Something like 25% off the lows of the day to finish some 10-15% higher for the session.

I couldn't find anyone who knew why, but all the traders I talked to suggested it had a certain "The Dukes know something!" feel to it. Who knows. Shit like that happens all the time. Sometimes someone actually knows something. Sometimes its just a very thin market and someone just thinks they know something. Anyway, theories are welcomed.


PNL4LYFE said...

The only thing I could find that roughly coincided with the timing were Lacker's comments that he wants to see the GSE's "demonstrably" privatized. But it's not clear to me how that would necessarily benefit preferred holders. I couldn't get any color from the guys who normally trade these; I think they were hiding under their desks by that time...

Accrued Interest said...

They are opening lower today. I see today's low for FRE.Z about the same as yesterday's low.

Let's not forget what happened to the Dukes, after all.

PNL4LYFE said...

Now Mudd saying he would like to boost the dividend as Fannie recovers... unbelievable.

Accrued Interest said...

That's like me saying I'd like to buy a yacht as I become a millionaire. There is a presumption of the future that is hardly a given.

~~~~~ Preftrader ~~~~~ said...

I think you have to sit back, stop analyzing these preferreds on a strictly financial basis, and smell the roses.

Preferred shares, as an investment vehicle have had their day. Definitely in the US; probably in Canada as well. The most bonafide issuers trash their own pref stock by flooding the market with more and more and more issues. American financial institutions could be excused from this behaviour because of, well, their overall sorry state. Most Canadian issuers, especially the banks which continue to earn upwards of $1B/qtr regardless of ABCP exposure, should be taken behind the shed, and flogged senseless. The market is so saturated with this paper that's rated P1, but nobody wants or needs it. At all. To the point where it is no longer possible to absorb the offerings without tortuous discounts. (Look at Loblaws, Brookfield lately. total garbage in the market; the underwriters are still sitting on 42% and 55% of these issues respectively a month+ later)

Fannie and Freddie prefs are clearly; yes clearly going off the board. It may take a minute or two longer than the common, but they are going to zero. For sure. there is no value in stock, common or otherwise, of bankrupt companies. So please stop analyzing logistics and take a closer look at what it is you're talking about.

I have never seen a more obvious short opportunity than these two issuers' truck.


~~~~~ Preftrader ~~~~~ said...

Oh, look; Warren Buffett seems to share my clarity, and support my viewpoint on this situation with this commentary he made this AM on CNBC:

“They're too big to fail,” Mr. Buffett said. “That doesn't mean that the equity can't get wiped out, and it almost has. In a practical sense, as institutions, they don't have any net worth.”

Mr. Buffett forecast that “you'll see some action fairly soon” to support the companies, but that he has not been approached to assist in any bailout. He said “nothing is going to happen” to investors in the companies' insured mortgages or debt, but “the equity and preferred stock is another question.”

~~~~~ Preftrader ~~~~~ said...

and then came Moody's, a few minutes ago with this:

NEW YORK, Aug 22 (Reuters) - Moody's Investors Service on
Friday cut its ratings on the preferred stock of Fannie Mae
and Freddie Mac on concern that market turmoil
has hurt their access to capital.

The rating company also slashed a rating that suggests a
greater likelihood the mortgage finance giants will require
"extraordinary financial assistance" from the government or

Moody's lowered the preferred stock ratings on the
companies to "Baa3" from "A1," and the bank financial strength
rating to "D-plus" from "B-minus," it said in a statement.

Investors have pummeled common and preferred shares of
Fannie Mae and Freddie Mac over the past two months as
speculation grew that the pace of losses on their mortgage
holdings and guarantees is quickly eroding their capital. Many
analysts expect the government will have to exercise its new
abilities to recapitalize the companies, effectively
"nationalizing" them.

"Given recent market movement, Moody's believes these firms
currently have limited access to common and preferred equity
capital at economically attractive terms," Moody's analysts
said, of the bank financial strength rating downgrade.

Moody's added that Fannie Mae and Freddie Mac are
restricted in their ability to support the housing market,
which is in its worst downturn since the 1930s.

Lockstep said...

I beg to differ PREFTRADER, on different grounds. To foreign investors, buying preferreds in US government chartered company is buying the US Gov. If they wipe out common, ok, I understand. But if they wipe out preferreds, which are held primarily by banks and foreign sovereignties, they are going to have a huge confidence crisis on their hands.

For any normal corporation, I would agree with you regarding the risk to any subordinated capital. But FRE and FNM (and FHA) in 2007 served as a backstop for the whole mortgage industry when the private lenders fled from the securitization business. That was not good business practice, that was a government entity fulfulling it's role. Thus it will be bailed out as any government entity would.

In fact, I believe the cheapest and simplest option for the government is to provide an equity infusion that does not subordinate anyone but recapitalizes the companies. This way FRE and FNM, irreplaceable at this point in the crisis, and continue to serve their role, the shareholders (mostly banks in a headlock and foreigners) keep their pants on, and the integrity of the US government as a sovereignty willing to pay their bills and back their institutions in times of crisis remains intact to fight another day.

Think about it...

~~~~~ Preftrader ~~~~~ said...

OK, I respect your logic. You may well be right in the end.

Only thing right now is Warren Buffett and Moody's seem to support my viewpoint.

Only time will tell, but right now bankruptcy means bankruptcy, regardless of the background or significance of the organization.