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Get Me Rewrite!

July 14, 2008

Among all the depressing lowlights of last week's stock run on Fannie Mae and Freddie Mac, the terrible quality of the coverage by nearly every outlet I encountered rates right at the top.  Because I remain a Fannie Mae shareholder, I tried to follow this pretty closely.  I even watched some cable financial news coverage, something I never do, and I hopped through Google and Yahoo Finance hourly.

Night after night, morning after morning, news outlets focused on the two GSEs, and not in a good way.  Rightfully so, because it was a big story:  two Fortune 500 companies that have become practically the only source of mortgage credit suffer staggering losses in their stocks, costing shareholders tens of billions of dollars and conceivably crippling both companies. 

But why did this happen?  What drove investors to rush out of these stocks?

Got Any Facts?

If you were a common investor with only a rudimentary understanding of these companies and relied on the mainstream media for information,  the message went something like this:  Fannie and Freddie are finally being held to account; decades of subterfuge and political management have finally yielded to an informed marketplace that realizes the two companies are in such terrible trouble only stupid investors are going to hold onto the stock; the two Washington, D.C.-based emperors of housing finance have no clothes; this is like Bear, Stearns all over again and the companies are facing insolvency; the federal government is going to have to take them over, taxpayers are about to take it in the kishkes.

Over the weekend the press hyped the story further and borrowed from their sports divisions by painting Freddie Mac's planned Monday(July 14, 2008) debt sale as a capital markets death match on which the health of the US economy hinged.  These stories typically did not point out that Fannie Mae had only days before handled a similar issuance without a hitch, and at a lower cost than one they had held the week before.  Such facts might have diluted the dramatic quality of the coverage, I guess.  As it turned out, Freddie went to market on Monday without any problems.

The press never explained what caused the rout.  Indeed, it seemed almost disinterested in the underlying dynamics.  Was it a profound and sudden shift in the company's fundamentals?  Had either one suddenly found itself cut off from the debt markets that are essential to fueling their day to day purchase and securitization of mortgages?  Were either one in imminent danger of failing their statutorily set minimum capital amounts?

If you consulted some investor reports, read the latter day statements from Treasury Secretary Paulson, or the GSEs' regulator James Lockhart of OFHEO, the answers to these important questions appeared to be...no, no and no.

Late in the week the two companies belatedly released statements confirming this.  They pointed out that their debt costs had actually declined in the prior week. They noted that their most recent debt issuances were oversubscribed.  They emphasized that they were in compliance with all regulatory capital requirements, and had tens of billions of capital on hand.

Even the Lehman report on a new FASB accounting rule that sparked the rout by noting the rule could conceivably require Fannie and Freddie to dramatically increase their capital to account for assets now held off their balance sheets noted this was a remote possibility, and OFHEO Director Lockhart quickly dismissed the speculation as unfounded.

So what caused the run?  Why were investors fleeing the stock?  Inquiring minds want to know.

Good News is No News?

News outlets did endlessly note that the two own or securitize more than 70 percent of current originations, but then moved on without much insight.  If you looked hard, you could find an isolated reference or two to the fact that these assets are being booked at much higher fees than in the past, and that tightened underwriting means these will be of higher quality than older loans. 

In other words, here are two companies whose regulator says that they are not suffering a liquidity crisis; that have adequate capital; that currently own their markets outright and are booking enormous amounts of new business; that have been able to increase fees that will provide income flow for years to come; and that have increased the quality of those assets and thus the likelihood that the higher income streams will be there in the future.

So with these fundamentals in place, why would their stocks lose more than half their value in a few short days?  Believe me, I am dying to know.

It would have been nice to have found a mainstream media story that actually pondered these issues and illuminated them.  But instead the public was treated to a lot of information but little insight.

The New York Times' Sunday news coverage of the affair amounted to little more than a rehash of old stories and quotes from long-time critics.

Jim Cramer was highlighted on endless loops of video declaring both companies dead.  He was never pressed to explain exactly why or how.  But he must have been delighted to have his opportunity to look glum and declare the need to nationalize both companies.

On Kudlow and Company on Thursday evening, the final word came from a commenter who asserted that the week's lesson was that Fannie and Freddie have been "crowding out" banks and it's high time they were pushed aside to allow the free market to work.  Never mind that there isn't a bank on earth today that will make a mortgage loan in the US that it does not believe Fannie or Freddie will ultimately invest in or securitize.  

This is what passes for informed commentary.

Sunday (July 13, 2008) evening's White House announcement of special steps the government is prepared to make seem to have calmed the market.  But the question that remains unanswered by mainstream press coverage still remains, why did the market dump these stocks in spite of all these facts? 

Maybe there are underlying, terrible facts about the GSEs' balance sheets or management that will yet come to light and justify the vaporization of so much market value.  As a shareholder I certainly hope not, but if it is I'd rather know why the end is near than be treated to mere assertions that this is so.

But maybe instead we'll learn this was an old fashioned run on two stocks driven by short sellers and panicked sellers, abetted by a press corps that would rather cover the race than uncover the facts.  Perhaps not coincidentally, the SEC over the weekend announced a new probe into the use of falsehoods and rumors to manipulate stock prices.  It will be interesting to see how the press covers that.


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