Fannie, Freddie And Lehman In The Eye Of The Storm

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This week’s trading has been dominated by concerns that Fannie Mae and Freddie Mac will essentially be nationalized by the US Govt and their common stockholders wiped out.  The catalyst was a story in Barron’s over the weekend “The Endgame Nears For Fannie and Freddie” (subscription required) which wrote:

Should the agencies fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises, according to our source. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie’s and Freddie’s existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends. Then again, the administration might show minimal kindness to preferred shareholders; local and regional bankers have been lobbying the Bushies not to wipe out the preferred since the bankers own a lot of that paper and rely on the bank preferred-stock market for much of their own equity capital [bold and italics added].

The last few days focus has also shifted onto Lehman Brothers (LEH) as investors consider its viability as an independent entity.  Yesterday, well known financials analyst Dick Bove speculated that Lehman might be acquired (“Lehman Could See Hostile Takeover” (subscription required), Barron’s, Hot Research, Thursday August 21):

The stage is set for a hostile bid to take over the whole company……

Will it happen?  I do not know.  Should it happen?  Absolutely, opportunities like this are rarely evident in the markets.

This morning, state run Korean Development Bank expressed potential interest in acquiring Lehman, causing Lehman’s shares to surge more than 10% today.

The common denominator between both these companies, of course, is their heavy exposure to mortgage backed securities:

Lehman’s business is borader than Fannie and Freddie, but the link is that they were doing the same thing – packaging mortgages and selling themDick Bove, quoted in the NY Times.

Something is going to happen on both these fronts – the GSEs and Lehman.  I don’t know what it is but it will be interesting and important for financial markets.

Disclosure: Top Gun has no position in Fannie Mae (FNM), Freddie Mac (FRE) or Lehman Brothers (LEH) shares.

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