Freddie, Fannie Decline Diminishes Prospects of New Investors

By Dawn Kopecki and Shannon D. Harrington

Aug. 25 (Bloomberg) — The cost to Freddie Mac and Fannie Mae of raising capital is getting more prohibitive by the day, making it likely that the government will have to inject cash into the largest U.S. mortgage finance companies.

Declines in the common stocks of the government-chartered companies accelerated last week to more than 90 percent for the year and yields on their preferred shares more than doubled on speculation Treasury Secretary Henry Paulson may need to bail them out, reducing or wiping out the value of the securities.

As long as a rescue is likely, investors will be reluctant to take part in any offering, said Richard Hofmann, an analyst at CreditSights Inc., a bond research firm in New York.

“The stocks’ freefall becomes sort of a self-fulfilling prophecy if it goes far enough, and we’re getting pretty close to far enough,” Hofmann said.

McLean, Virginia-based Freddie fell 52 percent last week to $2.81 on the New York Stock Exchange and Fannie of Washington dropped 37 percent to $5. Their preferred shares are trading as low as 19 cents on the dollar on speculation their dividends may be suspended.

The companies were created by Congress to boost homeownership and profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities.

Losses Grow

The two companies, which own or guarantee at least 42 percent of the $12 trillion in U.S. residential-mortgage debt outstanding, posted combined losses of $14.9 billion in the past four quarters as delinquencies rose to record levels. The losses depleted their capital and sparked concern they may not be able to weather the biggest housing slump since the Great Depression.

Freddie agreed in May to raise $5.5 billion of capital to appease regulators, though has yet to complete the financing. Fannie raised $7.4 billion that month in a similar agreement.

Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie’s capital stood at $37.1 billion, compared with a requirement of $34.5 billion, filings show.

The companies may need to raise at least $15 billion to convince investors they have enough capital, said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, estimates the Treasury will probably be forced to buy a combined $60 billion of preferred shares by October.

`Propitious Time’?

Freddie Chief Executive Officer Richard Syron told investors earlier this year he was waiting for the “propitious time” before raising money. That time may not come, Hofmann said.

Freddie has reached out to potential investors, spokeswoman Sharon McHale said last week. Private-equity firms TPG Inc., Kohlberg Kravis Roberts & Co., the Carlyle Group and the Blackstone Group LP told the company they are unwilling to invest in the company until it’s clear what steps Paulson may take, The New York Times reported on Aug. 23.

Carlyle spokeswoman Ellen Gonda, Blackstone spokesman John Ford and TPG spokesman Owen Blicksilver all declined to comment.

Fannie spokesman Brian Faith declined to comment.

Moody’s Investors Service on Aug. 22 cut Fannie and Freddie’s $36 billion in preferred stock five levels to Baa3, the lowest investment-grade, saying a bailout that causes dividend payments to be halted is increasingly likely.

Holders `Panicking’

“Any additional capital raises by Fannie and Freddie were going to have trouble being absorbed in the financial system without some intervention by the government,” Peoples Bancorp Inc. Chief Financial Officer Edward Sloane said in an interview.

Marietta, Ohio-based Peoples sold its $12.1 million of preferred shares in Freddie and Fannie, recording a pretax loss of about $1.04 million.

While Paulson said he was trying to “add stability and buy some time” by seeking authority to pump unlimited amounts of capital into the companies through a credit line or equity investment, the opposite is happening because “the holders at the bottom of the capital structure are panicking,” Hofmann said.

“They’ve got themselves in this negative loop where the only way they can raise capital is for the Treasury to put something in” first, said Friedman Billings’ Miller.

`Lack of Clarity’

The yields Freddie would have to offer to attract investors are two to three times what Fannie paid in its $7.4 billion preferred offering in May. Fannie gave investors a yield of 8.75 percent on 51.8 million shares of preferred stock that can be converted into common shares.

Freddie’s $1.1 billion of 5.57 percent preferred stock dropped 36 percent last week to $7.40, pushing the yield to 19.5 percent. Fannie’s $7 billion of 8.25 percent perpetual preferred stock fell 26 percent to $11.29 as the yield rose to 18.9 percent.

“It is the lack of clarity of what exactly the government is going to do,” said Axel Merk, president of Merck Investments LLC in Palo Alto, California. “To make this politically viable, why would the government even think about coming in junior to somebody else?”

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net.

What’s it going to be Lehman?

How about you Freddie?

A quick question though… Can a company actually keep trading even though they are technically insolvent? Who would buy into that? Why would one buy into that?

I suppose much like in housing there are “SHEEPLE” everywhere and for some rather very strange reasons, they are willing to catch falling knives until they bleed to death… A slow death, but death still the same.

What a completely horrible, and so entrenched establishment pick for a so called “CHANGE” candidate…

He may have just given McCain a silver spoon to victory… Next up John’s VP???

The problem with your suggestion of letting these countries take the losses are many, but the most important is this. Where are we going to get money from to lend and roll over existing debt if we don’t get it from China? Who do you think has allowed us to get into this mess by lending us money either directly or by buying treasuries and agency debt? This would be the classic case of killing the goose that lays the golden egg. As sad as it may be to say, this country can ill afford to lose China as a source of money. In fact we would ourselves be screwed by doing so and much worse off than if we just have the American Tax Payer foot the bill, which we will in the end.

That is the entire point of the 800 Billion blank check Paulson holds in his hand made out to Fannie and Freddie. They will need in my estimation 100 Billion right out of the gate and another 200 Billion or so by quarters end. Roughly 300 Billion for starters would be my guess and depending on how and when they unwind the bad paper you could be talking another 100 – 200 Billion by years end. All in all roughly 450 Billion is my guess. They will take another 250 Billion or so and pass that along to the FDIC to support the roughly 200 bank failures that have now started to take place and another 100 Billion to support the write downs on the bad paper the Fed is currently holding. The rest will be for whatever else shakes out along the way. In other words it will all be used and used fairly quickly. It is amazing the amounts of money we are talking about here…

The only option Paulson has is for the investors to take a pretty big hit and for the Tax Payer to foot the bill for the bond holders. There is no other option. That is why he is waiting and waiting to pull the trigger. The American Tax Payer will not be happy and some in the press are going to completely crush them when it is eventually announced. They will as some say “Get Hammered”

As Jim Cramer says however, and rarely do I agree with him, the insiders know what is going on and trading needs to be haulted due to the money involved and underlying things taking place behind the scenes. Some of this is just Paulson lineing things up for the take over, but some is insider stuff that if learned will not be pretty for those involved. We are talking about the largest Government “Bail Out” on Tax PAyers backs in history and more money than is even imaginable leaving the table. This is HUGE!!!

Fannie/Freddie bailout – who gets thrown under the bus?

You and me. Middle and working class Americans and their children. We will have the pleasure of paying for all this while those that created the mess get to keep on making bigger messes.

(It is of little question whether Fannie and Freddie will have to be bailed out. But, how do they do it? Many, including myself, think that nationalizing these firms and running them like FHA going forward is the least painful for everyone.)

Mr. Mortgage, you must be joking or possibly you have never dealt with FHA. That agency is an absolute joke and has been for over the 25 years that I have dealt with them. If “nationalizing” Fannie & Freddie means they will be run like FHA we are far better off just letting them fail now. Isn’t FHA about to fail too? Running anything like FHA is clearly not the answer and I can assure you would be very painful for everyone!

Russia and China hold about 1 Trillion between them and they can afford the hair cut. Why would the U.S. tax payer want to bail them out? Didn’t we learn anything from WW II? Does anyone recall what the U.S. was selling to japan before WW II? (Ship load after ship load, TONS of the stuff called “SCRAP METAL”) WONDER WHAT THEY WERE MAKING WITH THAT?

Don’t kid yourselves Russia and China are not our friends. Bailing them out and keeping them strong while weakening ourselves is a receipt for disaster.