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Fannie and Freddie?

Chris Farrell Oct 21, 2008

Question: Many of us know about the woes being felt by Fannie Mae and Freddie Mac, and their stock performance tells it well. But is now the time to buy them? I mean, with a history of a 40-60 point value, a low current value, and (seemingly) a government assurance of not failing, it seems pretty attractive to this novice investor. Thanks! Mark, Charlotte, NC

Answer: You’re right that the stock of Fannie Mae and Freddie Mac are still trading. But “low” seems too mild a word. As I’m writing this, Fannie Mae is trading at.880 a share–down 97.7% year-to-date. The comparable market figures for Freddie Mac are .940 and -97.1%, respectively. That’s a disaster for shareholders.

Here’s what the market service Morningstar said about Fannie Mae last month:

“The magnitude and duration of the housing bust and job losses will largely determine Fannie Mae’s fate. If the spiral of downward home prices, negative equity, foreclosures, and lack of financing alternatives continues, Fannie Mae might need substantial additional equity capital in order to operate. Not only are higher minimum capital standards and additional dilution a risk, the firm appears to be losing control over pricing, growth, and underwriting decisions to its conservator. The firm could also be nationalized outright based on future political decisions.”

The same holds for Freddie Mac.

I’m not a stock picker. I don’t think novice investors should be speculating. I guess if you have some entertainment money that might go toward an evening out, the slots at Las Vegas, or the stock of Freddie Mac and Fannie Mae, then by all means take a flyer. But its not an investment. It’s a speculation.

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