Bloomberg unveils all the ugliness that is F and F - that would be Fannie Mae and Freddie Mac, two public entities that can't lure investors even though their dire situation has pushed the yield on their latest instruments over 18%.
One wonders at this point what more needs to happen before Paulson puts on the breaks and tells everyone the party's over. In fact, it's been over for quite a while.
Fortunately for the next President of the United States, this nasty-smelling stuff will have to be cleaned away before they take office. But the ripple effect of what amounts to a default will be felt around the world.
Paulson and his pals in the Treasury did a great PR job with their initial weekend announcement that Uncle Sam would help Fannie and Freddie. Looks like they're going to have to make good on those nicely-timed Sunday-before-Monday-market-opening speeches.
It's hard to believe anyone would see an upside to investing in these equities at this point - and the future doesn't look much better.
When Moody's cuts you to Baa3 and spokespeople from Carlyle, Blackstone, TPG and Fannie clam up, you can bet the other shoe is going to hit you in the head when you least expect it.
Fannie and Freddie - RIP.
Here's the Bloomberg excerpt:
Aug. 25 (Bloomberg) -- The cost to Freddie Mac and Fannie Mae of raising capital is getting more prohibitive by the day, making it likely that the government will have to inject cash into the largest U.S. mortgage finance companies.
Declines in the common stocks of the government-chartered companies accelerated last week to more than 90 percent for the year and yields on their preferred shares more than doubled on speculation Treasury Secretary Henry Paulson may need to bail them out, reducing or wiping out the value of the securities.
As long as a rescue is likely, investors will be reluctant to take part in any offering, said Richard Hofmann, an analyst at CreditSights Inc., a bond research firm in New York.
``The stocks' freefall becomes sort of a self-fulfilling prophecy if it goes far enough, and we're getting pretty close to far enough,'' Hofmann said.
McLean, Virginia-based Freddie fell 52 percent last week to $2.81 on the New York Stock Exchange and Fannie of Washington dropped 37 percent to $5. Their preferred shares are trading as low as 19 cents on the dollar on speculation their dividends may be suspended.
The companies were created by Congress to boost homeownership and profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities.
The two companies, which own or guarantee at least 42 percent of the $12 trillion in U.S. residential-mortgage debt outstanding, posted combined losses of $14.9 billion in the past four quarters as delinquencies rose to record levels. The losses depleted their capital and sparked concern they may not be able to weather the biggest housing slump since the Great Depression.
Freddie agreed in May to raise $5.5 billion of capital to appease regulators, though has yet to complete the financing. Fannie raised $7.4 billion that month in a similar agreement.
Fannie had $47 billion of capital as of June 30, according to company filings. The company is required by its regulator to hold $37.5 billion. Freddie's capital stood at $37.1 billion, compared with a requirement of $34.5 billion, filings show.
The companies may need to raise at least $15 billion to convince investors they have enough capital, said Paul Miller, an analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. Bill Gross, who manages the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, estimates the Treasury will probably be forced to buy a combined $60 billion of preferred shares by October.
Freddie Chief Executive Officer Richard Syron told investors earlier this year he was waiting for the ``propitious time'' before raising money. That time may not come, Hofmann said.
Freddie has reached out to potential investors, spokeswoman Sharon McHale said last week. Private-equity firms TPG Inc., Kohlberg Kravis Roberts & Co., the Carlyle Group and the Blackstone Group LP told the company they are unwilling to invest in the company until it's clear what steps Paulson may take, The New York Times reported on Aug. 23.
Fannie spokesman Brian Faith declined to comment.
Moody's Investors Service on Aug. 22 cut Fannie and Freddie's $36 billion in preferred stock five levels to Baa3, the lowest investment-grade, saying a bailout that causes dividend payments to be halted is increasingly likely.
``Any additional capital raises by Fannie and Freddie were going to have trouble being absorbed in the financial system without some intervention by the government,'' Peoples Bancorp Inc. Chief Financial Officer Edward Sloane said in an interview.