Wednesday, December 30, 2009

Straits Times: Mortgage giants' shares rise on govt aid moves

Dec 30, 2009 
Mortgage giants' shares rise on govt aid moves 

LOS ANGELES: Money from speculators poured into shares of Fannie Mae and Freddie Mac on Monday, the first day of trading after the Obama administration in effect gave the mortgage giants blank cheques of federal support. 

But exactly how the United States government's move will pay off for their shareholders ought to puzzle most investors. 

The stock market's reaction mystified banking analyst Bert Ely. 'They're not going to get anything back,' he said of investors who have long-term faith in the two companies' shares. 

Of course, 'long term' for most people trading these two stocks probably means an hour or so. 

Freddie's shares jumped 34 US cents, or 27 per cent, to US$1.60; Fannie's stock gained 22 US cents, or 21 per cent, to US$1.27. Trading volumes for both were the highest since late October. 

The day's action was reminiscent of the speculative frenzy that erupted last summer, when the two companies' shares nearly quadrupled from the end of July to Aug 28. 

Then, Freddie's stock rocketed from 62 US cents to US$2.40; Fannie's shares soared from 58 US cents to US$2.04. 

On Christmas Eve, the Treasury announced that it was removing previously set limits on federal financial aid for the companies, which were seized by the US government in September last year amid mounting mortgage losses. 

The restrictions had capped aid at US$200 billion (S$280 billion) for each company. Freddie has so far tapped US$51 billion, and Fannie has used US$60 billion. 

The administration said it was removing the caps to 'leave no uncertainty about the Treasury's commitment to supporting these firms as they continue to play a vital role in the housing market during this current crisis'. 

But whatever additional federal money flows into Fannie and Freddie would almost certainly come at the expense of shareholders' remaining stake. 

The government now owns 80 per cent of both companies. The administration will announce its long-term strategy for Fannie and Freddie in February. 

The companies' losses could continue to balloon if, as some analysts suspect, the White House were to seek to use the companies to support new mortgage-forgivenes s programmes that would help struggling homeowners. 

Mr Ely noted another reason to doubt the stocks have any real value: The pay packages the Treasury announced last Thursday for the companies' CEOs consisted exclusively of cash compensation, with no shares offered. 

In contrast, the Treasury has required top executives of other large-scale recipients of federal aid to accept pay packages made up largely of stock and relatively little cash. 



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Martin Koh/ Sherry Tang
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