Blank check sends Fannie, Freddie soaring

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- Shares of mortgage finance giants Fannie Mae and Freddie Mac soared Monday after the Treasury Department announced what essentially amounts to a blank check for their bailouts.

Treasury lifted a $200 billion limit on the amount it was ready to pump into each of the two mortgage firms after the markets closed Thursday. Fannie Mae (FNM, Fortune 500) shares leapt 21% Monday to $1.27, while shares of Freddie Mac (FRE, Fortune 500) jumped 27% to $1.60.

While the support from Treasury would appear to be a vote of confidence for the firms, the companies' leaders apparently have no interest in owning the stocks themselves.

According to pay packages disclosed for Fannie Mae and Freddie Mac on Thursday, no stock or options are being issued to any of their top managers. That is unusual for shareholder-owned companies.

Other firms receiving federal bailouts, such as General Motors and American International Group (AIG, Fortune 500) have been pushed by the government to pay their executives with stock.

Both Fannie Mae CEO Michael Williams and Freddie Mac CEO Charles Haldeman were given $6 million annual pay rates for 2009, with all the compensation coming in cash. Other top executives received annual cash payments of $2 million or more each, according to the companies' filings.

The lack of stock and options for Fannie and Freddie executives suggests that when Congress and the Obama administration decide what to do with the mortgage firms, shareholders could be left with little or no equity.

Bose George, an analyst with investment bank Keefe, Bruyette & Woods, wrote in a note to clients that the lifting of the $200 billion limit is likely a sign that the Obama administration wants to use Fannie and Freddie to provide additional help to the housing market.

In July 2008, Congress gave Treasury the right to provide as much aid as it deemed fit to the two firms, meaning that the current administration does not need additional Congressional approval for more funding.

"We believe that this change is not primarily directed at covering losses from [the firms'] existing portfolios," he wrote Monday. "Our estimates suggest that even in a stress case scenario [the firms] are unlikely to exceed the $200 billion each that they had been allowed to access."

George said it's not a surprise that top executives at Fannie and Freddie would demand all-cash compensation packages.

"The shares have no long term value," he wrote. "This reinforces our view that the common shares will eventually trade to zero."

The Treasury Department reiterated Thursday that it expects to present its plan for what to do to reform Fannie and Freddie in February. But KBW's George said in an interview that he doesn't believe there will be much reform for at least another year.

George said it's clear that hundreds of billions of dollars in losses will have to be written off. He added that Fannie and Freddie will eventually need between $100 billion to $150 billion of assistance each from Treasury, making their bailouts by far the most expensive of the financial crisis.

The shares of the two firms are still publicly traded even though the federal government placed the companies into conservatorship in September 2008 due to losses from rising home foreclosures and falling home values. The two firms own or insure about $5 trillion of mortgage-backed securities between them.

The conservatorship will give Treasury about 80% of the shares of both companies, but it puts taxpayers on the hook to cover ongoing losses. Fannie has drawn down $60.9 billion and Freddie has drawn $50.7 billion of federal help so far under the reorganization process. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,912.11 -70.48 -0.42%
Nasdaq 4,442.70 -2.21 -0.05%
S&P 500 1,969.95 -8.96 -0.45%
Treasuries 2.46 -0.03 -1.16%
Data as of 1:06am ET
Company Price Change % Change
Frontier Communicati... 6.79 0.85 14.31%
Windstream Holdings ... 11.83 1.30 12.35%
AT&T Inc 36.59 0.94 2.64%
CenturyLink Inc 39.90 2.19 5.81%
Bank of America Corp... 15.34 -0.16 -1.03%
Data as of Jul 29

Sections

McDonald's may be liable for worker lawsuits, not just franchisees, in a government ruling that could change the fast-food business. More

Amgen is the latest to continue corporate America's cost cutting strategy, even as the economy is supposedly on the mend More

Bunch o Balloons allows multiple water balloons to be filled at once. Parents are loving it -- to the tune of $645,000. More

Steve Mason, a pastor from California, inherited more than $100,000 in student loan debt when his 27-year-old daughter died suddenly in 2009. With interest and late penalties, the debt has since ballooned to $200,000. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.