Fannie, Freddie stocks at last slip into obscurity

June 16, 2010

Fannie Mae and Freddie Mac are at last slipping into a form of obscurity. The U.S. mortgage giants will delist from the New York Stock Exchange under order of their watchdog. When they start trading in the penny stock market, investor attitudes may change — but the government fiction that the two are private companies almost certainly won’t.

The ostensible rationale for the Federal Housing Finance Agency’s directive to move them off the big markets is that Fannie’s stock has lately averaged less than the $1 minimum price required by the NYSE and that Freddie’s has fallen close to that level. With no obvious argument to reset their share prices, a delisting was inevitable.

More significantly, the two companies can’t continue pretending to act in the interests of public shareholders while behaving as fully paid-up arms of the government. Fannie and Freddie are propping up the U.S. residential housing market. They end up holding or guaranteeing almost all new mortgages — and their regulator wants them to back more home lending to people who, with the best will in the world, can scarcely afford the payments.

Disappearing from the NYSE will make Fannie and Freddie less noticeable, though they’ll continue to file reports with regulators. The ranks of shareholders, who by keeping the companies’ market capitalizations not far off $1 billion apiece seem to have clung to some kind of option value, will no doubt be further reduced to those who can tolerate illiquid over-the-counter trading. But what perhaps really should happen — a purchase of the shares by the government — won’t.

That’s because separate ownership is critical to the conceit of keeping the debt and guarantee obligations of the two behemoths, more than $5 trillion combined, off the government’s books. The U.S. Treasury has undertaken to pour money into Fannie and Freddie — roughly $140 billion so far, but with no limit — to keep their net worth above zero. That’s in substance a full guarantee, but not one the government recognizes.

Leaving the two companies’ stocks trading on the equivalent of the pink sheets will help spare the government’s blushes for a while longer.

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