Monday, August 18, 2008

News of Interest

Many of you may not know that the temporary Securities and Exchange Commission moratorium on "naked" short-selling ended Wednesday last week. The ban protected 19 troubled financial stocks from naked short-sellers.

None of the group of 19 stocks fell during the ban. But since it lapsed, Lehman Brothers stock is getting creamed while Fannie and Freddie are near death. So, did the moratorium actually help anything or merely delay the inevitable?

Bailout Rumors Slam Fannie, Freddie

Bailout rumors have Fannie and Freddie shareholders worried that those stocks are in a race to zero.

On Monday, Fannie Mae and Freddie Mac plunged off a weekend report that posited that the government will indeed need to rescue the cash-starved firms and that equity holders will end up losing their shirts.

Fannie fell 17.8%, or $1.41, to $6.50 and Freddie lost 16.6%, or 97 cents, to $4.88. Investors don't have much left to lose; both companies have lost more than 90.0% of their market value in the last year.

Uncle Sam's paternal posturing in recent months had initially calmed investor anxieties. However, as the likelihood has lessened that the two will be able to raise enough capital to stay afloat on their own, Wall Street has begun to view the U.S. government as a dangerous rescuer instead of a benevolent savior.

The shareholders who own about $9.2 billion of stock in the two government-sponsored mortgage enterprises just don’t match up against the holders of $1.8 trillion in bonds issued by the less-than-dynamic duo or the owners of $5.3 trillion of mortgage-backed securities that they guarantee.

In response to the Barron's article that sparked the morning sell-off, the U.S. Treasury reiterated Monday that it will not serve as a "backstop" for the two firms, but investors weren't buying it. In July, Treasury Secretary Hank Paulson responded to a sharp fall-off in Fannie's and Freddie's stock price by saying that the government would explicitly guarantee their debt, lend them money or buy equity in them in order to to ensure that they wouldn't fail.

The government may also enjoy a perverse benefit in nationalizing Fannie and Freddie: Nervous investors will likely buy up U.S. Treasuries as they flee from GSE paper. This would lower the T-bond's yield and save the government a bundle in interest.

Lehman May Put a Prized Unit on the Block

Lehman Brothers, the troubled investment bank, is considering the sale of all or part of its prized money management division to private equity firms to raise billions of dollars of capital and ease the pressure caused by losses related to real estate.

Lehman now faces the capital-raising problem that haunted Merrill Lynch last month. As the third quarter draws to a close, it is looking more likely that Lehman will have to write down the value of its mortgage and other investments to a degree that could wipe out all of the investment bank’s earnings.

Like Merrill, Lehman has run out of easy options to raise money. That forces Lehman to consider selling some of its more valuable assets. Aside from the potential sale of its investment management unit, Lehman is looking to offload assets, including a portfolio of up to $40 billion worth of troubled commercial real estate assets, according to investors involved in that sale.

Closing Note:

Housing Starts and Producer Price Index data is released tomorrow. Based on anaylst expecations, starts will likely register a very low reading -- the lowest in 17+ years while "Core" PPI will likely ease slightly.

Ought to be another interesting day in our free market economy


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