Fannie Mae: A Bad Feeling

[HenryTo]

Fannie Mae (FNM) just made another multi-year low today, closing down 2.6% at $47.52 a share. I believe this is the lowest price since Fall 1998:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=fnm&sid=0&o_symb=fnm&freq=2&time=13

For some reason, I have a bad feeling about this.

[nodoodahs]

Define "about to" - FNM was at $70+ in January, it's fallen what, 35% or so in a year? Not too long ago it traded over $80.

I think "collapsing" is a slightly better descriptor. The only questions are how far does the stock fall, and more importantly IMO, what happens to their debt?
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[Marketmaker96]

Fanny Mae is about to collapse....investors have no idea of the major impact this time bomb will have on the US financial world.

A chain reaction of companies pulled down with the fall of FM is inevitable and even cause big problems in Europe.


advise: sell asap

[nodoodahs]

http://www.marketthoughts.com/forum/viewtopic.php?t=195&postdays=0&postorder=asc&start=17

Posted four months ago.

[HenryTo]

"Bad feeling" realized - as Fannie Mae plunges approximately 10% in the last two hours of trading today:
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Fannie Mae shares plunge on report of probe

Wed Sep 28, 2005 05:54 PM ET

WASHINGTON, Sept 28 (Reuters) - Shares in Fannie Mae plunged on Wednesday after a report saying investigators found new accounting violations at the mortgage finance enterprise, which is already under scrutiny for bookkeeping distortions.

A spokeswoman for the Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae's financial soundness, would not confirm or deny on Wednesday a Dow Jones report that extensive additional problems had been found.

"We have an ongoing examination and I have no comment," said Corinne Russell, a spokeswoman for the Office of Federal Housing Enterprise Oversight.

Fannie Mae (FNM.N: Quote, Profile, Research) shares tumbled following the report, which said investigators discovered evidence executives overvalued assets, underreported credit losses, and misused tax credits. The article cited unnamed sources close to, or who have been involved in, the inquiries.

Fannie Mae stock had been down less than 1 percent before the article was published at about 1320 EDT (1720 GMT), but moved quickly lower. Shares closed at $41.71, down 10.7 percent, in their biggest one-day drop since the market crash of October 1987.

The drop wiped out more than $4 billion of the stock's market value.

Fannie shares were exerting the most negative pressure of any stock in the Standard & Poor's 500 index, although the benchmark index remained modestly higher for the day.

Last year, OFHEO accused Fannie Mae of accounting improprieties in the midst of an extensive review of the company's books. Fannie Mae acknowledged accounting problems, ousted top executives and said it would restate earnings.

Officials at the company did not return calls seeking comment.

Fannie Mae is also under investigation by the Securities and Exchange Commission, the Departments of Labor and Justice, and by a legal team appointed by the company's board of directors.

SEC officials declined comment. Officials at other agencies could not immediately be reached.

[HenryTo]

Chairman Greenspan continues to try to talk up the necessity for curbing for Fannie and Freddie's portfolio. My feeling is that this is turning into more of a non-issue by the day, even more so by January of next year when Greenspan retires.
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Greenspan Issues
Another Warning
On Fannie, Freddie

By JOHN D. MCKINNON and DAWN KOPECKI
Staff Reporters of THE WALL STREET JOURNAL
September 15, 2005

WASHINGTON -- Federal Reserve Chairman Alan Greenspan, in his strongest warning yet, said in a recent letter that Wall Street investment firms eventually could be incapable of hedging all the financial risk posed by mortgage giants Fannie Mae and Freddie Mac, if Congress doesn't impose meaningful limits on them.

"As Fannie and Freddie increase in size relative to the counterparties for their hedging transactions, the ability of these [companies] to quickly correct the inevitable misjudgments inherent in their complex hedging strategies becomes more difficult," Mr. Greenspan wrote in the letter, dated Sept. 2, to Sen. Robert Bennett (R., Utah), and reviewed by The Wall Street Journal.

Mr. Greenspan's letter concludes: "In the case of [Fannie Mae and Freddie Mac], excessive caution in reducing their portfolios could prove to be destabilizing to our financial system as a whole and in the end could seriously diminish the availability of home mortgage funds."

Legislation to impose a range of new controls over the congressionally chartered companies, known as government-sponsored enterprises, or GSEs, has been stalled in the House, in part over Mr. Greenspan's concerns that it doesn't go far enough in curbing the growth of the companies' mortgage portfolios.

Many conservatives, who see Fannie and Freddie as a form of government intrusion, also worry that another provision of the bill would strengthen the companies' already-substantial political clout on Capitol Hill, by substantially raising the amount of money they dedicate to affordable-housing programs around the country.

The two companies borrow money to buy home mortgages. They either hold the mortgages in their own portfolios or sell them to other investors. Because they can borrow almost as cheaply as the federal government itself, critics worry that there are no effective curbs on their potential growth, and particularly the growth of their portfolios. That is a potential concern because their portfolios of mortgages make the companies extremely vulnerable to interest-rate swings.

The companies try to hedge that risk through complicated strategies involving derivative investments such as interest-rate swaps. But Mr. Greenspan and some others worry that as the companies and their portfolios grow, they could overwhelm the ability of Wall Street banks to act as the counterparties. Already, market participants have reported occasional shocks when sudden zigzags in interest rates have brought the companies -- along with other mortgage-market players -- into the swaps market suddenly.

Freddie Mac said Mr. Greenspan's comments were consistent with prior statements he has made. The company also sought to play down concerns about systemic risk posed by its portfolio investments. "Our portfolio is very conservatively managed and tightly regulated," said Freddie spokesman David Palombi, pointing to the elaborate tests that federal officials run to measure its safety. He also suggested that the markets themselves would prevent untoward growth of the companies, and warned that "arbitrarily limiting our retained portfolio would decrease over time the availability of the long-term, fixed-rate, prepayable mortgage."

Fannie declined to comment.

While holdings of mortgages and related securities by Fannie and Freddie have soared during the past 15 years, so far this year their combined holdings have declined. At the end of July, the combined total came to about $1.449 trillion, down 7% from the end of 2004. That is partly because Fannie has been shrinking its holdings to meet stiffer capital requirements imposed by the company's regulator in the wake of an accounting scandal.

But critics worry that if the current wave of scrutiny passes without strong new legislative curbs, the companies will be free to start growing again. That concern led Mr. Greenspan to warn earlier this year that passing the House bill would be worse than doing nothing.

---- James R. Hagerty contributed to this article