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Friday, March 28, 2008

Short Entry Zones Were Damn Near Perfect

In March 24th, 2008 in my post Short Covering on Bear, Goldie, Lehman, Fannie and Freddie I tried to determine just how some of these beaten down names would bounce. I also looked for good short entry points. I must say: DAMN NEAR PERFECTLY TIMED.

Fannie, Freddie May Raise $20 Billion, Regulator Says (Update1): “Fannie Mae and Freddie Mac, the U.S. government-chartered mortgage companies, may raise as much as $20 billion in capital as part of an agreement that allows them to buy more debt securities, their regulator said.”

The market might view this crap as Bullish… but reality will eventually sink in. COMMON shareholders WILL GET WIPED OUT as there will be MANY such capital raises in the coming months and years by FNM and FRE. COMMON shareholders will get owned. FNM and FRE investors can then go hang out with Thornburg Mortgage (TMA) bagholders at the bar and drink their rage and sorrow away together. The final deal, and this could be years down the road, for FNM and FRE will be similar to the current TMA deal. COMMON shareholders will get 10% of the company at most and instead of preferred shares and convertibles, the GOVERNMENT will step in directly. I suppose that if anybody can get their money out of these names, it would be the BONDHOLERS as the government would not let the debt go into default (a la Bear Stearns).

This is ALREADY their second visit to the capital markets:

“Fannie Mae, based in Washington, raised $7 billion in December by selling preferred stock. McLean, Virginia-based Freddie Mac sold $6 billion a month earlier.”

Right now they can’t even be sure that they COULD raise more capital. That’s why they don’t even know HOW they’ll go about it yet:

“The companies didn't say last week how or when they would raise the additional capital.”

How funny is it that bagholders (that would be YOU poor bastard taxpayers) are currently upset about the taxpayer backed Bear Stearns (BSC) bailout? Cuz, this one is going to be OH SO MUCH BIGGER (eventually).

Related Posts:
Bear Stearns: Bagholders Start to Agitate
Thornburg Mortgage: Pyrrhic Rescue
Sarcastic Rant on Fannie and Freddie
Bear Stearns is Dead, Lehman is Probably Next


Anonymous said...


Nice if you can do it. Although I've made money consistently this year on short side trading, I've never managed to get the timing exactly right, especially with the ultra-shorts. Annoying as hell.

Anonymous said...

And re FNM + FRE, don't they usually issue debt? And make money off the spread. GSE debt is, or was, rather sought after. If so, I don't see this as dilutive to shareholders.


Anonymous said...

“Fannie Mae, based in Washington, raised $7 billion in December by selling preferred stock. McLean, Virginia-based Freddie Mac sold $6 billion a month earlier.”

Yeah, OK, sorry. We'll see how they go about in the future -- I'd be surprised to see more stock sales. But maybe they'll have to because their old spread business model isn't working so well with their own debt being seen as risky.

Anonymous said...

Nice post Ben. I was waiting for these entries too. Saw them early Tuesday morning and jumped in. We could see a small bounce early next week before we leg down further.

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