Make Money Investing The Warren Buffett Way
Fannie Mae (FNM) and Freddie Mac (FRE) are two of the most hated agencies on Wall Street. These quasi government agencies are blamed for much of the problems related to the housing crisis. They are criticized for backing risky loans and encouraging an environment of risk taking by guaranteeing liar loans. Many politicians and citizens have even called for the abolishment of both agencies. Although Freddie Mac and Fannie Mae may be terrible investments, they are a necessary cog in our economy.
I have been saying for some time now that Freddie Mac (FRE) and Fannie Mae (FNM) are worthless organizations. Both government sponsored organizations have massive debt loads that they can never hope to repay. The two firms have a combined market cap of just $1.1 billion dollars. The government owns $145 billion dollars worth of two companies that do not make even one cent of profit. These 2 companies only exist to prop up the mortgage market.
While both companies will likely stay in business (due to the federal government), common stock shareholders will ultimately lose everything. Both stocks have been booted from the New York stock exchange for failing to hold a $1 value. Shares of Fannie Mae dropped 40% and are currently trading at 56 cents. Freddie Mac isn’t faring much better dropping 40% to 73 cents per share. Investors shouldn’t go anywhere near shares of Fannie Mae or Freddie Mac. These 2 stocks have penny stock daytraders written all over them.
Why would anyone buy shares of Fannie Mae (FNM)? The stock currently trades for just over $1 a share. I have no idea where that value comes from because Fannie has a $1 billion dollar market cap and an enterprise value over $620 billion dollars. The “good news” for Fannie Mae is that the troubled government sponsored enterprise (GSE) lost only $13.1 billion dollars last quarter. The $13.1 billion dollar loss was below the $16.3 billion dollar loss in the first quarter of 2009. The bad news is the Fannie Mae needs an additional $8.4 billion in government aid. If approved the government will have pumped $84.6 billion into Fannie Mae. Some analysts estimate that Fannie Mae will need an additional $50 billion dollars over the next few years. There is no way that Fannie Mae will ever be profitable enough to repay all of these loans.
Not to be outdone last week Freddie Mac (FRE) asked the government for an additional $10.6 billion dollars in cash. This was on the heels of the GSE reporting a first quarter loss of $6.7 billion dollars. If Freddie’s request is approved, they will have received $61.3 billion dollars in government aid. The government owns 79.9% of both GSE’s in the form of Treasury senior preferred stock and common stock warrants. So, investors are buying stock in 2 government owned entities that are hemorrhaging money and whose CEO’s don’t see them repaying any of their massive debt loads for the indefinite future. Somehow a company with a negative earnings, negative book value, and negative cash flow is trading for $1.37 per share.
The third penny stock is AIG (AIG). You might think that AIG is not a penny stock because it trades for $42.89 per share. That is only after its 1 for 20 reverse split. Without the reverse split, AIG is a $2.14 stock. AIG is the mother of all government subsidies with over $182.3 billion dollars in bailout funds. AIG does deserve credit for being the one government owned firm that has been able to produce positive earnings. AIG earned $1.5 billion dollars in the first quarter of the year. AIG also deserves credit for selling off assets to try and repay government loans. AIG has raised roughly $50 billion dollars through asset sales such as its recent sale of AIA to Prudential. The question for investors is how much equity will be left for shareholders with the government owning 79.9% of the insurance giant and AIG selling off its most valuable businesses?
Disclosure: I do not own shares of any of these companies.
Photo by: futureatlas.com
