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Wednesday, July 09, 2008 1:12 PM

Record Spreads On Fannie Mae

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Capital concerns are still affecting Fannie Mae (FNM) and Freddie Mac (FRE) in spite of assertions from James Lockhart, director of the Office of Federal Housing Enterprise, that the GSEs are "well capitalized".

For a rebuttal to the "well capitalized" thesis please see We're All Homeowners Now, Nationalization of Fannie, Freddie Unavoidable.

Professor Depew does not believe Fannie is well capitalized, I don't either, but more importantly neither does the Market. Here is the evidence: Fannie Mae Pays Record Yield Spreads on Sale of Two-Year Notes.

Fannie Mae paid a record yield over benchmark rates on $3 billion of two-year notes amid concern the U.S. mortgage-finance company doesn't have enough capital to weather the biggest housing slump since the Great Depression.

The 3.25 percent benchmark notes priced to yield 3.27 percent, or 74 basis points more than comparable U.S. Treasuries, the Washington-based company said today in an e-mailed statement. That's the biggest spread since Fannie Mae first sold two-year benchmark notes in 2000.

Investors and traders are overlooking the government's implied guarantee of Fannie Mae and Freddie Mac debt as credit losses grow. Credit-default swaps tied to their $1.45 trillion of AAA rated debt are trading at levels that imply the bonds should be rated A2 by Moody's Investors Service, according to data compiled by the firm's credit strategy group.

Yields on agency mortgage securities relative to U.S. Treasuries climbed toward the 22-year high reached in March amid concern that financial companies including Bank of America and Fannie Mae may need to sell the debt.

The difference between yields on Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened as much as 212 basis points, according to data compiled by Bloomberg. The spread today was at 189 basis points.
These ridiculous statements about Fannie being "well capitalized" smack of the same nonsense we heard with round after round of never-ending capital raising efforts at many financials. Does anyone remember these assertions?
  • Citigroup (C) is well capitalized.
  • Lehman (LEH) is well capitalized.
  • Merrill Lynch (MER) is well capitalized.
  • Ambac (ABK) is well capitalized.
  • MBIA (MBI) is well capitalized.
  • Bear Stearns (BSC) is well capitalized.
Now we are hearing that Fannie Mae and Freddie Mac are well capitalized. Everyone knows it's a lie. So why say it? The answer is obvious: to attempt to placate the markets. Lies, however, can never accomplish that.

Mike "Mish" Shedlock
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