Killing Fannie & Freddie (FNM, FRE)

Barney Frank may have caused a recovery of some banking losses in trading yesterday by saying he’d be against any bank-trading abolition that would be immediate and/or financially disruptive to an economy that is still very vulnerable.  But Barney Frank’s comments today are throwing up more risks for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) and their survival.  Barney Frank has noted that he wants to abolish Fannie Mae and Freddie Mac in their present form and coming up with a new whole system of housing finance.

We recently picked both brands that were on the list to fail this year, and Barney Frank’s comments are only part of the risk to their model.  We have heard even in 2008 that Alan Greenspan said both Fannie and Freddie should be nationalized and then resold to the public in as many eight entities.

There is probably only one reason that Uncle Sam has not just collapsed these two entities already.  The government would have to consider the ramifications of having all the Fannie and Freddie secured and unsecured debt directly on the Federal balance sheet.  Imagine the entire housing loan market having a government backstop rather than just the GNMA (Ginnie Mae) mortgage market.

If you think of the common stock and even the preferred stock of Fannie Mae and Freddie Mac as really being stock, think again.  With these being in conservatorship they are merely symbolic of long-term warrants that give an implied call option to their survival based upon a rapid return of the housing market, a return to high prosperity, a return to high and sustained economic growth, and a less-hawkish regulatory environment.  What are the odds of all that lining up?  Very low.

At 11:30 AM EST we have Fannie Mae shares down 5.6% at $1.00 and Freddie Mac shares are down 8.4% at $1.20.

JON C. OGG