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On Fannie and Freddie Common
I checked this morning on the borrow cost for Freddie Mac. It was offered to me at 30% from one house and 40% at another. What this means is that it is very expensive to be short the stocks, and of course that is exactly why they are going up in this explosion of volume. By way of comparison C has gone from the “No Borrow” list to having shares available to cover a short at 2% per year. That squeeze is over. We shall see what happens with the stock price.
Citi converted a ton of Pref. into common on July 29. The deal allowed old holders of distressed Pref. stock (including the US Treasury TARP investment) to convert to common stock. The conversion was done at the notional value (par) of the Pref. stock. In the Citi deal a Pref. holder got about 3.25 shares of common for each $25 share of the Preferred.
The most wildly optimist scenario for either Fannie or Freddie is that they get the same treatment as Citi did. Fannie and Freddie common are currently changing hands at about $2.00. If the same treatment were afforded to the Agency pref. holders as in the Citi deal it would imply that a $25 pref. should be worth $7 and the $50 pref. would be worth $14.
Well that is not the case. You can buy all of the Agency $25 pref. you want at a cost of $1.5-2.0. This implies that smart money is not looking at this. It is simply not logical for a $2 common and $1.5 Pref. stock.
Look at it the other way if like. If a conversion rate of 3 to 1 were to be used to resolve the Agency pref. it would imply that the ‘fair value’ of the common would be closer to 50 cents. About where it was a few months ago before all this short covering started.
This late summer stuff is a fool’s game.
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Wow, hadn't checked C for a while. Last call I was quoted 15% and callable.
Very nice. Thanks.
Yes they started flying when one OZ fund manager wrote a thesis of several thousand words on why Franddie wwere greate buys after his fund bought some prefs. That was quickly supported by a strong recommendation to the readers of AC from the Fed's favorite blogger and ex-employee Mr John Jansen. Some of you reading this blog and who also read AC surely must have bought some of Franddie, so owe up, smart money folks! Good for you if you made money, just remember that the OZ blogger lost some serious money buying Lehman and recommending it to his readers, and also Wamu.
Freddie and fannie have billions in counterfeit mortgages on thier books. If that place is ever audited by an independant agency the laughter would crack the world in two.
Actually us holders of the Citi preferred shares received 7.3 shares per $25 of preferreds. This from Citi press release where I think you got the $3.25.
>>Number of shares of common stock offered per depositary share calculated by multiplying (a) the liquidation value
per depositary share by (b) the Exchange Factor, and dividing this amount by $3.25, the price at which Citi is
valuing the common stock to be issued in the exchange offers.<<
Now this really makes the FNM/FRE preferreds interesting.
Joe Eifrid
Why dont you create a net short position using options and then buy the prefered?
these two stocks going nuts
funny how the C common was fairly unchanged during this time give how much money was unwound in the arb.
Nice article and very timely, Bruce. Thank you.
can I x2 that
well, why would they do something like that? FRE/FNM prefs are non-cumulative, so they dont owe any dividends. And given they are already fully backed by the govt, its not like they need to meet "capital adequacy" tests realistically....
I was struggling to understand this and you just put into perspective for me. Thanks
Well done
"I checked this morning on the borrow cost for Freddie Mac. It was offered to me at 30% from one house and 40% at another. What this means is that it is very expensive to be short the stocks, and of course that is exactly why they are going up in this explosion of volume."
no shit sherlock, i looked at the same thing, was going to go short the stock and long the preferreds as a hedge. not at 30% cost.
and the stock markets are efficient? give me a fucking break.
Thank you, sir.