Evidence Of A Fannie Mae (FNM) And Freddie Mac (FRE) Resurrection

The collapse in the shares of Freddie Mac (FRE) and Fannie Mae (FNM) was arrested yesterday. At one point, both stocks were up and Fannie Mae ended the day in the plus column. It has begin to occur to the market that the managements of the two companies are not lying. The firms might just be viable without a significant bail-out. Their share price action shows that at least someone is buying the story.

Freddie Mac is actually in the field trying to sell shares to private equity firms. The fact that it has even begun the process is encouraging. The fact that anyone will listen to the company’s pitch is at least a hopeful sign. According to The Wall Street Journal, "Senior management has been talking with a wide array of possible investors this week," said David Palombi, Freddie Mac’s chief spokesman."

The Treasury could thwart the discussions by insisting that any money put in by the government would wipe out new common and preferred shareholders. That would completely negate any chance of private funds coming in and would not do much to serve tax-payers who have already seen tens of billions of dollars put into the financial sector.

At the very least, Treasury could tell new money that, in the event of a full bail-out, it will be cashed out at a price no less than what it puts in now. That takes most of the risk out of any private re-financing, but it could save the government billions of dollars.

Why should the citizen who is already likely to be burdened with higher taxes be asked to do what the private sector can? Building a safety net for new money put into Fannie Mae and Freddie Mac is not too much to ask.

Douglas A. McIntyre