Thursday, August 21, 2008

Death Watch

Investors continue to watch nervously as the moribund GSE’s (Government Sponsored Enterprises) teeter on the brink of insolvency.

Shares for Freddie (52 week high was $65.88) plummeted yesterday by 20% to $3.35.  Shares for Fannie (52 week high was $70.57) fared only slightly better with a 13% decline to $5.23.  Stockholders reacted to the prospect of the government stepping in to rescue the two giant agencies.  In such event, common shares will be rendered worthless.

Treasury would love for Freddie Mac and Fannie Mae to save themselves from their present liquidity crisis.  But that hope seems to be fading every day. 

What's putting these two agencies on critical?

The Wall Street Journal reports how Freddie was forced to sweeten a bond offering this week to complete a $3 billion auction of its debt.  Investors, especially foreign ones, want more incentive to buy these bonds.   They aren’t convinced of the health of Freddie, nor the US housing market.

The Federal Government cannot allow these two giants to fail.  Doing so would bring a grinding halt to the mortgage industry.  The two agencies play the dominant role in financing conventional mortgages.  Without their part, what life remains in the housing market would die.

Market conditions can change faster than the weather.  And you could wake up tomorrow and find that you, the U.S. taxpayer, are now an owner of these once mighty enterprises.  

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