Bottom’s Up!

As Princess Leia said to Luke Skywalker, “This is some rescue!”

Since the Treasury assured investors that Fannie and Freddie would continue “as is,” stocks of the big mortgage originators have fallen another 50%. What gives?

This is a case of safe investments being … safe. Bondholders in Fannie and Freddie have hardly seen a hiccup.  But stock investors are rightly concerned that if the Feds take control, they’re gonna get wiped out. Remember Bear Stearns? That “bailout” cost equity investors 95% off the stock’s highest level.

But Bear’s bondholders did fine. And Agency bondholders have hardly seen their investments’ prices change at all. The Fed’s are stepping in because Fannie or Freddie’s outright failure would result in a cascade of bank insolvencies across the financial landscape.

Too big to fail? Maybe. But equity investors, the true risk-takers here, could still get wiped out.


Douglas R. Tengdin, CFA
Chief Investment Officer
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