This and FRE are the most volatile stocks on the exchange, at least for the last week, with no news. Imagine what it will be like with the Financial Bailout announced and the details yet to okayed by the Senate and House. Yes, volatile and huge swings. A trader's dream.
I would add the following,which has hugely increased my comfort level in playing these two stocks:
September 7, 2008
STATEMENT OF FHFA DIRECTOR JAMES B. LOCKHART
Fannie Mae and Freddie Mac share the critical mission of providing stability and
liquidity to the housing market. Between them, the Enterprises have $5.4 trillion
of guaranteed mortgage-backed securities (MBS) and debt outstanding, which is
equal to the publicly held debt of the United States. Their market share of all new
mortgages reached over 80 percent earlier this year, but it is now falling. During
the turmoil last year, they played a very important role in providing liquidity to the
conforming mortgage market. That has required a very careful and delicate
balance of mission and safety and soundness. A key component of this balance has
been their ability to raise and maintain capital. Given recent market conditions, the
balance has been lost. Unfortunately, as house prices, earnings and capital have
continued to deteriorate, their ability to fulfill their mission has deteriorated. In
particular, the capacity of their capital to absorb further losses while supporting
new business activity is in doubt.
Today’s action addresses safety and soundness concerns. FHFA’s rating system is
called GSE Enterprise Risk or G-Seer. It stands for Governance, Solvency,
Earnings and Enterprise Risk which includes credit, market and operational risk.
There are pervasive weaknesses across the board, which have been getting worse
in this market.
Over the last three years OFHEO, and now FHFA, have worked hard to encourage
the Enterprises to rectify their accounting, systems, controls and risk management
issues. They have made good progress in many areas, but market conditions have
overwhelmed that progress.
The result has been that they have been unable to provide needed stability to the
market. They also find themselves unable to meet their affordable housing
mission. Rather than letting these conditions fester and worsen and put our markets
in jeopardy, FHFA, after painstaking review, has decided to take action now.
Key events over the past six months have demonstrated the increasing challenge
faced by the companies in striving to balance mission and safety and soundness,
and the ultimate disruption of that balance that led to today’s announcements. In
the first few months of this year, the secondary market showed significant
deterioration, with buyers demanding much higher prices for mortgage backed
In February, in recognition of the remediation progress in financial reporting, we
removed the portfolio caps on each company, but they did not have the capital to
use that flexibility.
In March, we announced with the Enterprises an initiative to increase mortgage
market liquidity and market confidence. We reduced the OFHEO-directed capital
requirements in return for their commitments to raise significant capital and to
maintain overall capital levels well in excess of requirements.
In April, we released our Annual Report to Congress, identifying each company as
a significant supervisory concern and noting, in particular, the deteriorating
mortgage credit environment and the risks it posed to the companies.
continued next post=====
In May OFHEO lifted its 2006 Consent Order with Fannie Mae after the company
completed the terms of that order. Subsequently, Fannie Mae successfully raised
$7.4 billion of new capital, but Freddie Mac never completed the capital raise
promised in March.
Since then credit conditions in the mortgage market continued to deteriorate, with
home prices continuing to decline and mortgage delinquency rates reaching
alarming levels. FHFA intensified its reviews of each company’s capital planning
and capital position, their earnings forecasts and the effect of falling house prices
and increasing delinquencies on the credit quality of their mortgage book.
In getting to today, the supervision team has spent countless hours reviewing with
each company various forecasts, stress tests, and projections, and has evaluated the
performance of their internal models in these analyses. We have had many
meetings with each company’s management teams, and have had frank exchanges
regarding loss projections, asset valuations, and capital adequacy. More recently,
we have gone the extra step of inviting the Federal Reserve and the OCC to have
some of their senior mortgage credit experts join our team in these assessments.
The conclusions we reach today, while our own, have had the added benefit of
their insight and perspective.
After this exhaustive review, I have determined that the companies cannot continue
to operate safely and soundly and fulfill their critical public mission, without
significant action to address our concerns, which are:
• the safety and soundness
issues I mentioned, including current
• current market conditions;
• the financial performance and condition of each company;
• the inability of the companies to fund themselves according to normal
practices and prices; and
• the critical importance each company has in supporting the residential
mortgage market in this country,
Therefore, in order to restore the balance between safety and soundness and
mission, FHFA has placed Fannie Mae and Freddie Mac into conservatorship.
That is a statutory process designed to stabilize a troubled institution with the
objective of returning the entities to normal business operations. FHFA will act as
the conservator to operate the Enterprises until they are stabilized.
The Boards of both companies consented yesterday to the conservatorship. I
appreciate the cooperation we have received from the boards and the management
of both Enterprises. These individuals did not create the inherent conflict and
flawed business model embedded in the Enterprises’ structure.
The goal of these actions is to help restore confidence in Fannie Mae and Freddie
Mac, enhance their capacity to fulfill their mission, and mitigate the systemic risk
that has contributed directly to the instability in the current market. The lack of
confidence has resulted in continuing spread widening of their MBS, which means
that virtually none of the large drop in interest rates over the past year has been
passed on to the mortgage markets. On top of that, Freddie Mac and Fannie Mae,
in order to try to build capital, have continued to raise prices and tighten credit
FHFA has not undertaken this action lightly. We have consulted with the
Chairman of the Board of Governors of the Federal Reserve System, Ben
Bernanke, who was appointed a consultant to FHFA under the new legislation. We
continued next post
Look at recent history - last week it trended up to 2.73 based on the speculation that the bill was going to be passed then reversed to the low 1's. So history maybe a descent gage as to what we see tomorrow.