Monday, July 07, 2008

Rumor of the day

Apparently today's sudden sell-off (rally in bonds) has something to do with Fannie Mae and Freddie Mac. Both stocks are down ~25%, MBS are getting crushed (FNCL 6% underperforming the 5-year by close to 3/4 of a point) and even agency debentures are 5-ish wider. Pretty big single-day move. The 2-year Treasury went from 2.55% to 2.36% in about 10 seconds. Now that's a flight to safety!

Its also obvious rumor mongering. Haven't heard any specific rumor of earnings pre-announcement or anything like that. Both companies don't report until August. I'll post what I hear.

Hearing that one of Freddie Mac's top 3 shareholders either has or wants to dump his shares. FRE/FNM CDS are 80bps senior and 200bps subordinate, the former is 13bps wider on the day and the later about 23.

Update #2:
The main-stream media has been citing a Lehman research report discussion the adoption of FAS 140, which according to the report would require $46 and $29 billion of capital for Fannie Mae and Freddie Mac respectively. Say what you want about FAS 140, but the Lehman report is absolutely positively not why the market is moving today. First of all, the report want issued early this morning. The sell-off really got going in the early afternoon. Second, the Lehman report is bullish on the GSE's stocks! From the report...

"One issue we want to focus on in this report is a pending FASB rule change, the outcome of which could be so contrary to all other current capital ratios and policy initiatives that we cannot imagine such an outcome occurring."


"But at these prices we are sticking by our view that the NPV of the GSEs' profit growth and intrinsic franchise value should produce returns that make today's price look compelling."

Looks like bank and broker CDS can't catch a bid despite the FRE/FNM story. Also 2-year swaps, which initially pushed 3bps wider just as the GSE's were cratering is now about 1/2 of a bp tighter. Don't read that as indifference about the GSE's, read that as what can happen when a trade becomes uni-directional.

MBS spreads were as much as 20bps wider on the day, now only 7. Straight agency debt still about 5-8 wider. FRE/FNM CDS in the same context, maybe 2-3 better than the wides.

If you care, here is my view on a GSE bailout, basically that it would most likely take the form of direct government-backed debt, as opposed to some huge outlay of cash. It will happen if it comes to that.


wagner2626 said...

Also hearing that Radian may go into runoff. This would really hurt the equity of the GSEs as they have massive exposure to the MIs.
Also losses keep climbing and the massive guaranateed portfolios just look like they have losses possibly far inexcess of the 21bps in fees/year that they have been earning.

Sivaram V said...

I think it's the Fannie and Freddie issue... although you say that the report came out earlier in the day, FNM and FRE only started plunging around noon.

Again, accountants being dumb. On top of their push for mark-to-market during stressful times, now they expect Fannie and Freddie to raise $40+ billion? Of course this makes no sense to anyone except an accountant who probably knows a lot of numbers but don't know what they mean in the markets.

The Bloomberg article says an exception will be granted but that makes it even worse. Then you will have some companies using the rule while some don't (I guess if your goal is to create confusion and increase uncertainty then that's a great idea.) They should seriously re-think all this new regulation and rule changes in the thick of a big credit crisis.

Accrued Interest said...

Not that I'd be surprised if Radian went BK, but RDN stock is up sharply today.

I have a feeling there are some unsubstantiated rumors floating around that go beyond what I'm hearing. As I'm writing this, the S&P has cut their loss in half in about 20 mins. Which smells an awful like rumor trading.

Anyway, right now I'm letting the market rally before resetting my shorts. No need to be a hero and chase it all the way to the bottom.

Unknown said...

What do you think about the Fannie Mae Preferreds (FNA) that were issued in May. It is at 33 converts in to. 1.5 shares of Fannie andhas an almost 30% yield. Is this a buy?

Accrued Interest said...

You can't know what will happen to subordinate securities should there be a government bailout. And the odds of such a bailout are relatively high.

If you want to take a flyer on FRE/FNM, I'd just buy the common. If the GSE's can pull through, you are looking at huge increases in the stock price. I wouldn't do it personally, but I think that's a better call than the converts.