Wednesday, November 21, 2007

Fannie and Freddie go south

Fannie Mae and Freddie Mac shares continue to fall after posting big losses on Tuesday.

Worries over the financial condition of the two lenders, both government-sponsored enterprises, deepened on Tuesday after Freddie Mac reported a third quarter loss of around $2 billion dollars.

Here's the latest on Wednesday's action from Reuters.

Shares of Freddie Mac (FRE.N: Quote, Profile, Research) fell as much as 9.5 percent on Wednesday after analysts slashed their price targets on the stock, saying an unexpectedly wide third-quarter loss may make it tough for the No. 2 U.S. home funding company to inject the liquidity needed to rescue an ailing housing market.

Government-sponsored enterprises Fannie Mae (FNM.N: Quote, Profile, Research), the largest U.S. home funding company, and Freddie Mac have been hit by mounting losses as home foreclosures continue to climb and the credit crisis drains the value of mortgages they own.

Our "Jive Turkey" award goes to the Wall St. analysts who have once again stepped in after the fact to lower their price targets in line with recently pummeled share prices.

Goldman Sachs analyst James Fotheringham cut his price target on Freddie by two-thirds to $24, lowered his earnings estimates and said the company might face a further decline in the fair value of net assets in coming quarters.

Bear Stearns analyst David Hochstim cut his price target on Fannie Mae from $75 to $70.

Credit Suisse analyst Moshe Orenbuch cut his price target on Freddie Mac to $27 from $45 to reflect the company's limited capital flexibility.Fannie Mae fell nearly 1 percent on Wednesday.

Paul Miller, an analyst with Friedman, Billings, Ramsay, who downgraded Freddie to "underperform" from "market perform" and slashed his price target to $20 from $55 on Tuesday, said he expects the company to raise up to $5 billion but is unclear on how and in what form it will raise capital.

And so on...

Frankly, this whole GSE business puzzled me, as I could not figure out why such startling irregularities at Fannie and Freddie were ignored by investors, who consistently shrugged off late filings and accounting problems at the two firms.

Having never been more than a casual observer of these companies, I had to wonder: was I missing something?

Yesterday's carnage was no surprise to investor Jim Rogers, who spoke with Bloomberg about the problems at Fannie Mae and Freddie Mac.

According to Rogers, who is still short the two lenders, no one is sure what is going at Fannie Mae or Freddie Mac. He also feels that the problems from the subprime lending mess will take years to clean out.

Watch this interview clip to hear more.

We'll see you on Friday. Happy Thanksgiving, gang.