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Bad-News Friday Nights

by: Fred Wilson September 05, 2008 | about stocks: FNM / FRE    
Fred Wilson

Fred Wilson

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If you've been paying attention, the Fed likes to release bad news after the markets close on Friday afternoon. The past couple weeks, they've announced the failures of small regional banks.

Well today, they announced something just a little bit bigger - the government bailout/takeover of Fannie Mae and Freddie Mac, the two large mortgage finance guarantors. The markets have been expecting this for a while, but obviously not everyone was expecting it as their stock prices were $5.50 and $4 respectively when the market closed today. If everyone was expecting this, then those prices would have been a lot closer to zero.

This means the US taxpayers are now the guarantors of many of the mortgages that have been issued in recent years. Nobody really knows how much liability that the government/us taxpayers have taken on, but it's certainly a huge number, way more than the savings and loan bailout of the late 80s.

I've been reading The Black Swan, which talks about the impact of highly improbable events and how often they actually happen. Two years ago, if you had asked Wall Street insiders what the probability was of a bankruptcy of Fannie Mae (FNM) and Freddie Mac (FRE), they'd have most certainly said less than 1%. And yet that is basically what we've just witnessed. It's not technically a bankruptcy, but the equity has been wiped out and the company has been taken over by the only entity that can guaranty the debt - the US govt/taxpayers.

Some will argue that this is really good news, that this marks the bottom of the bear market in real estate and the final capitulation from which we can now start moving higher. I don't think so. The small regional banks that the Fed's been letting go under the past couple weeks will continue to go under and I think we've got at least another six months to a year of bad news in the real estate/mortgage business before it's all over.

However, I've also heard that the smart money that was short real estate and mortgages for the past couple years has mostly closed out those shorts and is starting to put together significant capital to buy mortgages (maybe from us, the taxpayers, via Fannie Mae and Freddie Mac - just as smart money did after the S&L bailout).

So, we are closer to the bottom than the top and although we've got more pain to work through, the smart money is starting to shift their posture.

How does this impact startup land and venture capital? Well, from my vantage point, we've been largely spared for the past year. And I think we'll muddle through this period better than many other sectors. But the capital markets are a mess and we should not expect a rosy exit environment any time soon. And we should expect to continue to get bad news on Fridays after the market closes for a little while longer too.

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This article has 4 comments:

  •  
    Sep 06 12:34 PM
    What was that you wrote about "Fed likes to release bad news after the markets close on Friday afternoon....Well today, they announced something just a little bit bigger" ?

    Can you point us to this Fed announcement you write about? I know there have been several articles based on un-named sources, but you took a pretty big leap into make believe land when you transformed that into a "Fed announcement"
    Reply
  •  
    Sep 06 02:07 PM
    I don't think the Fed made any formal announcement, but there's an oft-used PR tactic known as 'early disclosure' to break the news to the press so as to soften the impact. (Imagine how the market would react otherwise). If you read other news reports, spokespeople from Freddie Mae/Fannie Mac have made comments on this matter.

    In any case, with the dire situation that the FMs are in, and the Fed wanting to stave off financial armageddon, and keep confidence in the market -- they'd do anything to lesson the panic. So far, they've been doing a pretty good job at lying to press and themselves!
    Reply
  •  
    Sep 07 10:24 AM
    Don't get comforable yet. Lehman is in a vice grip, AIG is in a vice grip, the FDIC is running low on cash, the leveraged loans are starting to default and consumer receivables are slipping as well. This doe snot bode well.
    Reply
  •  
    Sep 07 01:04 PM
    What you are missing is that this is, in effect, an admission that the credit markets would not touch the GSE in any form. This is a declaration of what amounts to bankruptcy for the national housing market, not to mention 50% of the commercial banks. It greatly complicates any resale of GSE mortgages, many of which are not well enough documented to sell, while others burdened with equity of redemption rights under state law, or subject to second loans/home equity loans that must be cleared to convey clear title. They are, in short, junk of the worst variety. They must be written off. End of discussion since no one can economically perfect clear title given the mess.

    Worst this is an implicit valuation of all more than 50% of the MBS issued in the last five years. These MBS are now unofficially written down to worse than junk. The international holders will seek relief, maybe sue the supervisors, executives (most of which have immunity).

    In the end this blow in conjunction with the debt owned on Soc Sec, Medicare and federal retirements, will be seen as an admission of national insolvency. Watch out for the dollar (the gold shorts held by the 3 largest New York banks) all will be turning on the holders, and the markets, to eat them alive. This has just started the unwinding and national insolvency. Move over Argentina, here we come as we stiff the rest of the world and lose our credit rating. Who do we blame?
    Reply
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