Monday, September 08, 2008

Fannie Mae & Freddie Mac (NYSE:FNM/FRE): Colour on news - Piper Jaffray

Piper Jaffray comments on Fannie Mae & Freddie Mac (NYSE:FNM/FRE) after the U.S. Gov't, led by Treasury Secretary Paulson, took control of co's yesterday, in an aggressive and bold move.

In exchange for a commitment to 1. provide capital to the GSE's to insure positive net worth, 2. a credit facility and 3. an MBS purchase program, Treasury will receive a $1 billion senior preferred stock issuance with a 10% coupon with warrants to purchase 79.9% of the company for a nominal price. Treasury could provide up to $100 billion in each GSE, if needed

Most importantly, the U.S. government takeover of FNM and FRE will ensure the last remaining significant source of liquidity to the U.S. mortgage markets will continue flowing. While the firm believes the market had already largely reached the conclusion that the government would not let the GSEs fail, this historic government action ensures a steady flow of liquidity to the mortgage market. Going forward, it is vital that the GSE organizations function smoothly from an operational standpoint, as they continue to work through significant mortgage credit challenges.

Treasury's action may provide a shot of adrenaline into the housing market through lower mortgage interest rates. To be sure, they do not believe that the government takeover of the GSEs will by itself bring an end to the current housing downturn. However, they believe Treasury's action could narrow mortgage spreads and reduce mortgage interest rates.

There might not be much left for current GSE common shareholders. Whether or not the government puts additional capital into the GSEs should be key to the final outcome. The preferred shareholders appear to have much more hope of retaining significant value over the long run.

Piper believes FAF, FNF, and NLY are stocks within their mortgage coverage universe that may respond positively to this historic government action.

Notablecalls: Not sure how to play this one. I suspect NLY etc. will be gapped up hard giving us zero chance to buy at decent levels. Same goes for the rest of the market.

So, we're gonna get spike & retrace. Will be looking for an entry after that happens. Overall risk premiums will fall, making stocks more attractive.

Note that Merrill Lynch is out with a broad mkt call saying US stocks are once again poised to outperform over the next 6-12 months.

PS: Congrats to FNM/FRE shorts. You made a killing.

1 comment:

david7777777 said...

My favorite call today was LEH lowering FRE/FNM from Buy to Hold!