Bear Raid?

After reading all the press accounts about the Fannie Mae and Freddie Mac stock price collapse over the weekend, I still didn't have the foggiest idea what had caused investor sentiment to suffer a sharp decline last week. Then a friend sent me this press release late last night. It's from the Securities and Exchange Commission, issued on Sunday (hmmm, the SEC was also working yesterday):

Washington, D.C., July 13, 2008 — The Securities and Exchange Commission today announced that the SEC and other securities regulators will immediately conduct examinations aimed at the prevention of the intentional spread of false information intended to manipulate securities prices. The examinations will be conducted by the SEC's Office of Compliance Inspections and Examinations, as well as the Financial Industry Regulatory Authority and New York Stock Exchange Regulation, Inc.

The securities laws require that broker-dealers and investment advisers have supervisory and compliance controls to prevent violations of the securities laws, including market manipulation. Examiners will focus on these controls and whether they are reasonably designed to prevent the intentional creation or spreading of false information intended to affect securities prices, or other potentially manipulative conduct.

Is it possible that the run on Fannie and Freddie constitutes one of the great bear raids in U.S. financial history? After all, the vast majority of American homeowners are still paying their mortgages, the companies appear well capitalized for expected losses, and are designed to weather even a further downturn as long as their still have access to capital markets (i.e., the ability to sell debt to roll over existing obligations, which the bailout package over the weekend is designed to insure. It made the implicit federal guarantee behind these institutions explicit).

We know that right-wing think tanks like Cato, the American Enterprise Institute, the Hoover Institution, and editorially supported by the Wall Street Journal have been braying for the dismantling of these two organizations for years. Is it possible that this is their, and their financial backers', chance?

Who might benefit from false rumors that drive the stock price down? You might want to read this New York Times story from a few months ago to get a few clues. Here's the lead:

Almost two centuries ago, as Napoleon marched on Waterloo, a scion of the Rothschilds banking dynasty is said to have declared: The time to buy is when blood is running in the streets.

Now, as red ink runs on Wall Street, the figurative heirs of the Rothschilds — bankers, traders, hedge fund gurus and takeover artists — are plotting to profit from today’s financial upheaval.

All the news stories about Fannie and Freddie talk about how the implicit government guarantees have allowed them to dominate the home mortgage refinance business (their job is to buy up mortgages from loan originators like banks, savings and loans and mortgage finance companies so those firms can continue to make new mortgages without raising additional capital). How big is their share? "Over 50 percent" all the stories say. Hmmm. Who has the other 40-plus percent? Nary a word. Might they benefit if Fannie and Freddie are dismantled? And how about recent purchasers of Fannie and Freddie debt who bought their bonds at deep discounts? Will the government bailout announced Sunday turn investments made last Monday into instant profits on the ever-active bond trading floor?

And what if this bear raid, if this is what it is, continues for another few weeks and the government takes over Fannie and Freddie, with the intent of flipping it back to the private sector in a few years without government guarantees. Who would be the big losers? Equity holders of current Fannie and Freddie stock, which were largely mutual funds which manage the middle classes' 401(k) assets. The other big losers would be Fannie and Freddie employees, who have seen their personal retirement assets wiped out in the current collapse.

At least the Washington Post covered that story this morning.

Disclosure: I own Fannie Mae and Freddie Mac stock in my retirement accounts, both individually and through mutual funds. It represents less than one percent of my retirement assets -- now. It had been about one percent.

Posted by gooznews at July 14, 2008 08:42 AM