Fannie Spanked, Freddie Pulverized on Lehman Analyst Note

Fannie and Freddie refused to take a breather from their heated race straight to zero.  Freddie won today's sprint with an 18% drubbing, while Fannie fell a mere 16%.  As if the recent horrible housing and economic news wasn't bad enough, a couple of Lehman analysts, hell-bent on dragging the entire financial sector into the toilet along with their employer's stock,  decided to put out a research note today claiming that an accounting change may force the two beacons of housing finance to raise an additional combined $75 billion in capital.  The analysts clarified that the companies would probably get an exemption from the rule making their research note entirely irrelevant, except for the part about $75 billion being a very large and headline grabbing number.  This is exactly the kind of skittish market where you can make a real name for yourself by issuing press releases touting large numbers for effect.  If I worked for Lehman, I would definitely be looking for every opportunity to get my name out there in the event that any of the 500 rumors floating around about my employer's possible liquidity problems turns out to be true.  

On May 14th, the day that Freddie Mac released earnings that "beat" expectations, I wrote a story about Freddie Mac increasing its Level 3 Assets by $127 billion.  I found this news to be incredibly alarming and was amazed that the stock ripped up to $27 on the news.  How can anyone possibly care about a $151 million loss that is "less than estimated" when $157 billion of Freddie's assets are being priced God knows where?  This from a financial firm that just had a major accounting scandal just a few years ago?  Investors chose to ignore the news about the increase in Level 3 assets and lapped up the new offering of common and preferred at prices roughly double today's prices.  Now investors are pounding the stock on a Lehman note that frankly isn't saying much of anything.  Spreads on Fannie and Freddie's debt are out at their widest since "the worst was over" in March.  This means more bad news for borrowers as rates are spiking again.

Fannie and Freddie won't fail.  If the Fed bailed out Bear, you'd better believe they'll bail out Fannie and Freddie for not only do they have an implied government guarantee, but they really are too interconnected to fail.  They also have combined debt of $1.6 trillion, with a capital "T" which is owned by investment banks and central banks all over the world.  No, they won't fail, but it doesn't mean the stocks can't go much lower.  And if Fannie and Freddie keep going lower, Lehman will be right there keeping the pace.