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Profit from Fannie Mae (FNM) and Freddie Mac (FRE)

Posted July 22, 2008

“As a service to Money Morning readers who are unfortunate enough to have been holding Fannie or Freddie paper, or to the venturesome few who wonder whether there is any among the debris, I thought I’d peer through the fog of uncertainty and try to figure out what the different classes of Fannie and Freddie securities may be worth.” — Martin Hutchinson

Blogger’s note: You’ve probably read or browsed or skimmed through about a hundred articles discussing Fannie Mae and Freddie Mac so far. And probably almost all of them fell into either the tirade or the lament catagory. A lot of editors, writers and supposedly smart analysts have been complaining about the current mortgage crisis and giving their opinions on a possible government bailout of Fannie Mae and Freddie Mac. But no one is saying anything new or helpful to investors. 

Instead of adding to this meaningless babble, Martin Hutchinson of Money Morning has decided to write something refreshingly practical about the situation. He’s provided his readers with a concise explanation of what will most likely happen to the companies and, most importantly, what’s in store for those holding Fannie and Freddie debt and for investors in the companies’ two forms of stock. And interestingly, Martin has discovered that if you’re adventurous, you may just be able to find a profit in the current debacle.

by Martin Hutchinson

Baltimore — (TFN): The bailout of mortgage giants Fannie Mae (FNM:NYSE) and Freddie Mac (FRE:NYSE) is extremely confusing to holders of their debt and equity securities, because it’s very difficult to figure out what the final outcome of the “rescue” might be, and if so, who benefits.

However, as a service to Money Morning readers who are unfortunate enough to have been holding Fannie or Freddie paper, or to the venturesome few who wonder whether there is any among the debris, I thought I’d peer through the fog of uncertainty and try to figure out what the different classes of Fannie and Freddie securities may be worth.

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Tread Lightly and Bury a Big Debt

Let’s start - gingerly - with the politics. It would be politically impossible to allow $5 trillion of mortgage debt to default, particularly since its purchasers had been told that it was “just as good as” U.S. government paper. The economically logical course would be to take Fannie and Freddie fully into government ownership, sweeping all their debt onto Uncle Sam’s balance sheet (thus roughly doubling its reported debt/gross domestic product (GDP) and debt/export ratios), and then winding down Fannie and Freddie’s operations, since neither entity serves a useful purpose in a proper free market.

That won’t happen, for two reasons. Read on to learn more.

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Posted by Martin Hutchinson · Filed Under US Stocks and Markets 

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