Geithner Lets the Cat Out of the Bag About Fannie Mae (FNMA)

The ongoing spat between Treasury Secretary Tim Geithner and Ed DeMarco of the Federal Home Financing Agency (FHFA) revealed a secret that many already suspected. The rift started two weeks ago when DeMarco refused to comply with Geithner’s request for mortgage principal reduction through the government-sponsored enterprises of the Federal National Mortgage Association (OTC: FNMA) and the Federal Home Loan Mortgage Corporation (OTC: FMCC). The government placed the two heavily-indebted, bailed-out mortgage giants into receivership under the control of the FHFA in 2008 during the midst of the financial crisis.

In a show of power, the Treasury Secretary announced today that the US Treasury will accelerate its winding down of backing mortgage portfolios held by Fannie Mae and Freddie Mac. Geithner also stated the Treasury would be entitled to a full income sweep from the two entities instead of just a 10% dividend. He then let out the not-so-secret secret. The Treasury is ending its practice of advancing funds to Fannie and Freddie simply to pay dividends that end up back in the coffers of the Treasury, which sounds an awful lot like a Ponzi scheme that most people would go to jail for.

Traders appeared in a state of confusion over the news. First buyers drove shares of Fannie Mae higher on the opening print. Shortly after the beginning of the session, the stock traded for $0.30, which ended up being the high for the day. Perhaps having second thoughts, buyers retreated and the stock fell over nine cents to the low trade of the day at $0.20, just a penny above the annual low. Over 20 million shares traded in the first 90 minutes of the session. The stock trades about three million shares on an average day. The stock ended the day with a loss of 20% to close at $0.236 on volume of more than 32 million shares. Traders will have the weekend to fully digest the news and recuperate from the 30% swing in share prices today. Before trading opens on Monday, they will want to know what all of this means for the futures of Fannie Mae and Freddie Mac. Does it simply come down to a game of financial chicken played between Geithner and DeMarco with both men blinking in the end?

The ride on Fannie Mae stock over the last year has been filled with ups and downs, but mostly downs. The stock gained almost 100% in February and traded for a new 52-week high at $0.40. After a steady five-month-long decline, shares started popping seven days ago and the stock traded as high as $0.34. The loss today wiped out all of the positive momentum experienced since last week.

Interestingly, stock promoters were rather muted about today. The most recent promotion occurred nine days ago with comments from Atomic Trades. This, and the other 20 promotions, can be viewed on Stockpromoters.com. However, commentary was not lacking on Twitter. The dividend charade caught the eye of @Minyanville, and @AlephBlog wonders what the true worth of Fannie and Freddie really is.

A really great question, @AlephBlog, a really great question.

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Published by Alan Masterson

Alan has over 25 years of trading experience in the U.S. equity markets. He began his career in finance working on a program trading desk specializing in over-the-counter stocks. His career progressed from that point to his current position as senior trader on an institutional trading desk. In the evenings, Alan teaches economics at a local community college. He has contributed articles to various publications over the last six years, including feature articles for an economics magazine and various financial blogs. You may contact Alan via his email (alanmasterson@wallstreetpr.com) or his Google+ page (https://plus.google.com/103338576216002376250).

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