Could Fannie Mae (FNM) and Freddie Mac (FRE) save themselves by merging into some kind of super GSE? The NYT’s Andrew Ross Sorkin thinks so. Unfortunately, the answer is “no.”
Yes, by merging, the two lenders could cut costs and realise synergies that could amount to billions in value (assuming they were willing to fire thousands of people).
Conservatively, a combined Fannie and Freddie could probably cut a third of its overhead and staff, saving some $1.2 billion annually.
The way Wall Street values companies, that means — presto — billions more in value, perhaps as much as $18 billion or $19 billion, could be created overnight.
Sounds great. The problem would be getting Congress and the Justice Department to sign off on the merger. The new entity would be an even more gargantuan taxpayer-backstopped monopoly in a market in which Fannie and Freddie are too big, and howls about the outrage of government subsidy of two irresponsible companies would only grow louder.
The current analyst-thinking, moreover, is that Fannie and Freddie have enough capital: several firms came rushing out last week to say that rumours of immediate collapse were overstated. )That may be so, but rumours of eventual collapse most likely aren’t.) So it would be tough for F+F to stump for a merger without implicitly confirming that they are desperate.
It’s true that a combined Fannie-Freddie might be able to survive for longer without additional capital (via mass firings). But the taxpayer resentment about the way F+F have already abused their government-sanctioned duopoly would nix any chance of a merger being approved in time to save either company.
Next solution, Andrew?
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