08 September, 2008

Fannie and Freddie plunge as Government takeover confirmed

US Treasury Secretary Henry Paulson announced Sunday that both Fannie Mae (FNM) and Freddie Mac (FRE) were being placed under government-operated conservatorship.  The executive branch was ousted and dividends eliminated.  Not good news for the embattled mortgage dealers whose hands are tied into about half of the nation's $12Trillion in mortgage debt.

The news sent stock soaring this morning, led by the Financial sector, as investors saw this as the "beginning of the end" of mortgage related turmoil in the US. While the banks led the Dow to an over 200 point gain out of the gate, the Tech-heavy Nasdaq lagged behind, by midday being up only a third of a percent.

While banks like Citigroup (C), and Bank Of America (BAC) were enjoying gains of 4 or 5% the same could not be said for Fannie and Freddie. The selling off was swift, and very ruthless with Fannie dropping 83% and Freddie following closely behind down 79% by midday.

While Investors assumed the worst case scenario for F & F, even the US Treasury was unable to put a price tag on the bailouts. Paulson came on television earlier Monday and admitted that the final cost is an unknown and will depend on several factors including the ultimate turnaround of the housing market. At least one estimate by William Poole (St. Louis Federal Reserve Bank President) has the bailout costing about $300Billion, according to Forbes.

A hefty price tag indeed, but certainly not something any Investor of the F & F twins surely will be to happy about.

Disclosure: Author does not own FRE or FNM

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