Fannie Mae & Freddie Mac's Stock Status Gets Downgraded
Friday, August 22, 2008PAUL KANGAS: There's good news for shareholders of Fannie Mae and Freddie Mac tonight. The trading week is over. But there's bad news: trading starts again Monday. The common shares have been punished by Wall Street this week and today, Moody's downgraded Fannie and Freddie's' preferred stock to just above junk status. The rating agency is concerned the firms won't have enough money to pay a preferred dividend. Stephanie Dhue looks at what's next for the mortgage finance giants.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Paulson has described his new congressional authority over Fannie Mae and Freddie Mac as a bazooka -- something that gave him a lot of firepower. He has also made it clear he doesn't expect to pull the trigger. Now, after a week of beating down shares of Fannie and Freddie, investors want to know exactly how Treasury will use the newest weapon in its arsenal. ISI analyst Andy Laperriere doubts investors will get the clarity they seek.
ANDY LAPERRIERE, MANAGING DIRECTOR, ISI: The precedent that the Treasury is trying to avoid is having the Treasury secretary say that the Federal government, the taxpayers of the United States stand behind the debt of a private company, so that's why they are very reluctant to provide the clarification that the market wants.
DHUE: Fannie and Freddie's financial situations are unsustainable, with losses exceeding revenues. Observers say regulators may not step in as long as the firms can manage their debt and provide liquidity to the mortgage market. Analyst Josh Rosner says the government is more concerned about the broader economy than what happens to Fannie and Freddie.
JOSH ROSNER, MANAGING DIRECTOR, GRAHAM-FISHER: What makes you have to act now if the concern is the add-on effect, the knock-on effect to the broader housing market and if we are not seeing higher interest rates and not seeing higher mortgage rates.
DHUE: The Treasury Department says it is on top of the situation and is talking with the two companies, their regulator and the Federal Reserve. Laperriere says the Feds have a good reason not to pull out the bazooka.
LAPERRIERE: If the Treasury were to provide capital to the GSE's, it really opens up a whole new can of worms, both politically and policy-wise and I think they want to avoid that.
DHUE: Treasury and regulators would have to decide things like whether common and preferred shareholders get wiped out or if there's a bailout plan that would eventually make shareholders whole; what happens to subordinated debt; and whether Fannie's CEO Daniel Mudd and Freddie's CEO Richard Syron, will manage the firms in the future.
ROSNER: Do I think that they are going to hand a blank check to Syron at this point to help keep him afloat? No, I don't think that's likely. I think Treasury would actually probably want significant controls over the company, its actions and its management before they would do anything.
DHUE: The next stress test for Fannie Mae and Freddie Mac will come in mid-September, when the companies have to refinance $223 billion of maturing debt. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
