Fannie and Freddie: Denials and Doom

It’s an old saw in politics that you should never believe anything until it’s officially denied.

Looks like the saying is coming true in finance too. The market is indicating that Fannie Mae and Freddie Mac are in deep doo-doo. The indication comes from Fannie and Freddie’s share price, now at 17-year lows. It comes even more strongly by the fact that the interest rate spread between what Fannie and Freddie pay on their notes compared to what the government pays is widening rather dramatically.

Now the confirmation comes in the denials.

First, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, which oversees the mortgage titans (albeit with a light touch), told CNBC, “Both of these companies are adequately capitalized, which is our highest criteria. They have been very active in the mortgage market, and they are continuing to be. And, in fact, Congress has put on them the requirement to do jumbo mortgages and they have been doing those as well.”

Treasury Secretary Henry Paulson chimed in in testimony to Congress, Ben Bernanke at his side, saying Fannie and Freddie are “working through this challenging period. “Their regulator has made clear that they are adequately capitalized.”

Mike “Mish” Shedlock of MISH’S Global Economic Trend Analysis makes a nice point to the contrary:

These ridiculous statements about Fannie being “well capitalized” smack of the same nonsense we heard with round after round of never-ending capital raising efforts at many financials. Does anyone remember these assertions?

• Citigroup (C) is well capitalized.
• Lehman (LEH) is well capitalized.
• Merrill Lynch (MER) is well capitalized.
• Ambac (ABK) is well capitalized.
• MBIA (MBI) is well capitalized.
• Bear Stearns (BSC) is well capitalized.

This is a but much since Citigroup, Lehman and Merrill are still active in the markets. So are Fannie and Freddie for that matter. But time after time the debacle is only obvious in retrospect.