Fannie/Freddie Flameout: Winners and Losers

Posted Aug 21st 2008 10:17AM by Peter Cohan
Filed under: Federal Natl Mtge (FNM), Politics, Housing, Recession

I am not sure that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) will make it through the month as public companies. Barron's quoted an anonymous senior official -- who sounds an awful lot like Hank Paulson to me -- that unless Fannie and Freddie could raise at least $10 billion each, the government would bail them out while wiping out common shareholders and eliminating the preferred dividend. Since then, investors have been dumping shares of Fannie and Freddie like there's no tomorrow.

Who wins and who loses if Fannie and Freddie's shareholders are wiped out? As I said on CNBC's Power Lunch this afternoon, the winners are investors who shorted Fannie and Freddie years ago and are now reaping enormous profits. I also think that some Wall Street investment banks will win big as they get the job of selling off Fannie and Freddie's pieces. The losers are their biggest common and preferred shareholders -- including some well known mutual funds.

The winners are:

Jim Rogers, Rogers Holdings - Rogers originally shorted Freddie and Fannie in March 2006 and appeared on Bloomberg on November 20, 2007 to discuss why he did it and where he thought their stocks would go.
Doug Noland, Prudent Bear - As I posted, since the late 1990s, Noland's research has concluded that Freddie and Fannie would "shudder" when the US credit bubble eventually burst. Noland has profited from the short bets he made -- but he says it is emotionally painful to watch them fail.

Doug Kass, Seabreeze Partners - Reuters reports that Hedge-fund manager Doug Kass successfully shorted "everything related to housing" in 2007. He is still betting Fannie and Freddie will keep falling. His Seabreeze Partners Short fund is up 24.08%, excluding fees, according to Reuters.
Lawrence Kam, Sonic Capital - I don't know what happened to Kam but in June 2003, the New York Times quoted him as saying, ''On an economic basis, [Fannie and Freddie] made no money last year.'' It reported that Kam was short Fannie. Kam may have been right -- but perhaps was too early with his call.

The losers are some of the biggest mutual fund houses. I've listed their names, the number of shares of Fannie and Freddie that they own and, in parentheses, the percentage of their Fannie and Freddie shares each owns. Data are from MoneyCentral (the numbers are as of the end of June in most cases and as of the end of March in others).

Fannie

AllianceBernstein: 134,168,536 (12.5%)
Capital Research Global Investors: 114,960,864 (10.7%)
Fidelity Management and Research: 49,660,300 (4.6%)

Freddie

Capital Research Global Investors: 64,658,000 (10.0%)
Legg Mason Capital Management: 53,282,704 (8.2%)
AllianceBernstein: 41,028,316 (6.3%)

Big holders of Fannie and Freddie preferred shares are mostly insurance companies. CNNMoney reports that these include the following:

Wilmington Trust (NYSE: WL), which CNNMoney reports is "a small Delaware lender [which] took an $8 million hit in the second quarter on the decline of the value of its holdings of Fannie and Freddie preferred shares."
Hartford Financial Services Group (NYSE: HIG)
Allstate (NYSE: ALL)
Genworth (NYSE: GNW)

Of all these winners and losers, I think the biggest loser ought to be securitization. That process of packaging thousands of loans into securities and selling them off to investors is so deeply flawed that I think it ought to be ended.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Tags: alliancebernstein, alliancebernstein global high income fund, alliancebernsteinglobalhighincomefund, allstate, allstate corp all, AllstateCorpAll, capital research, capital research global investors, CapitalResearch, CapitalResearchGlobalInvestors, doug kass, doug noland, DougKass, DougNoland, fannie mae, fannie maefreddie mac, fanniemac, FannieMae, FannieMaefreddieMac, featured, freddie mac, FreddieMac, genworth, genworth financial, genworthfinancial, hartford insurance, HartfordInsurance, legg mason, legg mason capital management, LeggMason, LeggMasonCapitalManagement, wilmingtontrust

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Reader Comments (Page 1 of 1)

8-21-2008 @ 11:18AM

ron sharon said...

have Fannie preferred stock paying 8.2%
and believed I am protected unlike common stock holders. Please advise
if this is correct and possible outcomes.

8-21-2008 @ 11:41AM

AJGORM said...

the winners are investors who shorted Fannie and Freddie years ago and are now reaping enormous profits.----I find this comment very disturbing. Here is proof that this fraud would cause this fall and short sellers knew this before it happened. Just goes to show that the public rip off is a joke and criminal.

8-21-2008 @ 12:19PM

william lindblad said...

It is becoming obvious that they are not the only ones seeking - and not finding capital.
Suggested reading on the general aol news.
real estate developer sentenced to death.
Over a year ago I mentioned these pension funds as a source for all of our real estate frenzy. They have a different system and if there is any truth it will stay hidden until after the games. If there is a lot of truth in this - think of consequences.