Monday, December 10, 2007

Fannie Mae (NYSE:FNM) in trouble – Barron’s

Barrons’ “The Trader” column discusses Fannie Mae (FNM), which last week bit the bullet and disclosed plans to raise $7bn in new capital in the next several mo’s, and also slash its qrtrly dividend. All of this is in response to recent losses that shrank the co's regulatory capital to $41.7bn, or $2.3bn above the minimum required. The capital-raising was likely prompted by impending mark-to-market charges that Fannie will have to make in its investment portfolio, including $42.4bn of subprime mortgages and securitizations and $33.8bn of Alt-A mortgage paper. To match the current prices of these securities indicated by the ABX index, recent trades and markdowns taken by various investment banks, Fannie should take an earnings hit in the range of $6.4-14bn, according to one informed source. Likewise, Fannie's claimed regulatory capital is exceedingly soft. It includes $9.89bn in deferred tax assets and $8bn in tax credits on low-income housing partnerships. Much of this total also should be written down, since there's no way that Fannie for years to come will generate the $36bn in future income needed to fully use these tax losses and credits. These assets have little to no liquidation value. Thus we'd stay away from Fannie, even though the Bush administration's subprime-mortgage freeze program caused the stock to rebound some.

Notablecalls: Missed this one yesterday, thanks Mike, for pointing it out.

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