Wednesday, March 12, 2014

Please Wind Down Fannie And Freddie

The US Senate is moving on a bill that will end Fannie Mae and Freddie Mac.  This is good news.  Those two "stocks" have been millstones around the neck of the American economy since long before the 2008 financial crisis.  Putting them out of their misery is the right thing to do.

Consider the basic philosophy of securitization that these two monstrosities represent.  Securitization does not create a new asset class.  It creates a pool where high-quality assets disguise low-quality assets.  Ratings agencies gave these pools top-notch reviews for years without bothering to look under the hood.  They would have seen that subprime mortgages were garbage if they had looked but that was too much effort.

Stupid preppies running hedge funds bought these securities by the truckload.  Pension funds backed their trucks up to Fannie and Freddie's loading docks and bought even more.  These were supposedly the smartest people around.  They bought one dumb MBS and ABS after another.  Now the Fed is buying up whatever agency securities remain in the dumbest move of all time.

The fundamentals on Fannie (FNMA) and Freddie (FMCC) tell a pathetic story.  They are both trading far from their 52-week highs and traded in the pennies in early 2013.  They both have massively negative retained earnings despite years of outright government support.  Neither of these zombie entities come remotely close to meeting my personal criteria for investment.  Warren Buffett liked them years ago and got out before things got bad.

Hedge funds think they can wait out this Senate bill.  Let them all go bust.  Fannie and Freddie are like handouts to hedge fund managers who are too dumb to generate alpha.  End the handouts now.

Full disclosure:  No positions in FNMA or FMCC at this time.