Wednesday, August 20, 2008

FNM and FRE really could go bankrupt - sorry about that bulls

Don't hear much from the Fannie (FNM) and Freddie (FRE) bulls. The silence is astounding.

There were so many people who loved these two companies and swore by them. Still do. There are so many people who think that what is happening can't be, that it simply isn't true that a group of loans made between 2005 and 2007 -- and it is just those two -- could wipe these two giants out.

They were thinking about all of the juicy fees that FNM and FRE have. They were thinking about market share and how the reversals suffered by Bear and Lehman (LEH) and all of the other former competitors to FNM and FRE were going to lead to giant earnings in 2009 and 2010. Most important, they trusted these two companies to make good loans, to actually do a good job, to not accept awful subprime fiascos or home equity joker loans (they don't do those) and to give an accounting of themselves that would have made this impossible to happen.

They thought that Alt-A loans were good ones because they went to people with real money. They didn't think these were junk loans. They thought that given the lower dollar limit of FNM's and FRE's home portfolios, the two would be safe. They thought that because there was insurance on the premiums that would be worth something; they would be safe.

The bulls always thought, in the end, that FNM and FRE were powerful and would always be rescued somehow by its myriad friends in Congress and by the regulators themselves, who the bulls thought would just look the other way. The bulls are saying, "Say it ain't so."

Well, all of the assurances and confidences and cleverness of these two companies weren't equal to their recklessness and their actual misjudging of the housing market. No one put a gun to FNM's or FRE's head. They didn't have to be reckless. But they were. Their seal of approval ending up meaning nothing. They just turned out to be another group of hucksters defeated by two years of sloppy lending in America.

What's really amazing when you think about it is that 14 million homes changed hands between 2005 and 2007, and only half of them used exotic mortgages that we all know now were pretty vicious. Most of these loans haven't even had a chance to default yet, and the ones that have were most likely not even good enough to be in FNM's or FRE's pool. No matter, whatever it was, it was enough to bring 'em down, because they were, in the end, so terrible at their jobs!

I know that they could be MBIA (MBI) -like, Lazarus-like, coming back, because of some sort of divine intervention I am not aware of.

But to me, they just seem to be companies that will have destroyed faith in stocks and faith in a lot of money managers who, now silent, stood by them.

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