Citi remained unfazed by last week’s spectacular sell-off of Fannie Mae (FNM) and Freddie Mac (FRE) and reiterates its Buy for both on the basis that nationalization is unlikely and that both lenders remain adequately capitalised:
The GSEs’ current structure, as shareholder owned companies, has enabled them to effectively perform their mission. We think lawmakers recognise the value of equity in cushioning risk, and are not likely to
make the “implicit” guaranty “explicit”.
OFHEO (the ultimate judge of capital adequacy) stated that the GSEs are adequately capitalised. Our analysis suggests that FNM and FRE exceed their regulatory required surplus amounts as of 2Q-end by $11.5 and $3.7 billion, respectively.
In the end, says Citi, that investors dumped the two stocks on Friday reflected a “crisis in confidence” rather than a “fundamental change” in either of the two lenders’ capital positions.
That’s the bullish position. The bearish one is that the losses haven’t yet begun to hit and that, when they do, Fannie and Freddie will need to raise billions of new capital.
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