Sell off in Fannie Mae, Freddie Mac driven by unfounded fears - Citigroup

NEW YORK, Jul 11, 2008 (Thomson Financial via COMTEX) -- FRE | Quote | Chart | News | PowerRating -- Citigroup Friday backed its buy ratings on Fannie Mae and Freddie Mac, saying the recent sell-off in their shares is driven by market fear and not by fundamentals.

Shares of Fannie Mae and Freddie Mac plunged to 18-year lows Friday after Standard & Poor's downgraded the government-sponsored enterprises (GSEs) and U.S. Treasury Secretary Henry Paulson indicated that a bailout of the troubled mortgage giants is not on the horizon.

Fannie Mae shares fell 30% to $6.68 in intraday trading before paring some of their losses to change hands at $9.18 on a volume of 160.6 million shares. Freddie Mac shares fell 34% to $3.89 in intraday trading before rallying to trade at $5.24.

"The recent pressure on the shares of FRE and FNM reflect market concerns/confusion surrounding potential future dilutive capital raises," analyst Citigroup analyst Bradley Ball wrote in a note to clients.

"We spoke with FRE management this morning and they indicated that there has been no significant change in their financial condition during 2Q beyond prior guidance, and that they remain on track to gain SEC registration soon and pursue their $5.5 billion commitment to raise new capital (half common and half straight preferred) at an opportune time," Ball added.

He also noted that the Office of Federal Housing Enterprise Oversight (OFHEO) has said both entities have adequate amounts of capital.

The timing of the recent "noise" is challenging, since the companies are in the quiet period before its second-quarter report, he observed.

Fannie's and Freddie's cash positions have been in question for some time, given their high levels of debt compared with banks, Ball said, but government regulators can and should speak out to instil market confidence in the companies.

"At a minimum, OFHEO needs to step up and express its support for management, reminding investors that the GSEs continue to perform their mission and are adding less risky new business with solid margins," Bell wrote.

He added that nationalizing the GSEs is unnecessary and costly for taxpayers. "The GSE structure has worked in the past (such as during 1998) and continues to work today," providing non-federal capital support for the U.S. housing market.

Michelle Rama mr/vj

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