Company Watch
ANALYSIS OF BREAKING NEWS
Fannie Mae:
Where's The Surprise? December 4, 2007 - Fannie Mae (FNM-NYSE) (officially known as Federal National Mortgage Association) announced a cut in its dividend and a plan to raise $7 billion in capital. This is almost as surprising as the New England Patriots beating the Miami Dolphins. This is not an unexpected event. And FNM won't be the last one to take this path. The specifics: FNM will cut its quarterly dividend to 35 cents a share from 50 cents a share. That starts in the first quarter of 2008. If you own the stock now you'll receive 50 cents as usual. Three months from now, you'll get 35 cents a share. The $7 billion in new capital will come from a convertible preferred stock in one or more offerings this month. That will look good for year end numbers when someone checks the capital base. This is $7 billion that will go straight to the equity portion of the balance sheet, giving the company flexibility to offer more loans or cover more losses.
The company needed to address the subprime mess and try to give consumers and investors renewed faith in the mortgage market. By taking direct action (and that assumes the $7 billion convert will happen without too onerous terms attached), FNM is helping put more capital into mortgages. (Its purpose is to buy loans from banks and other lenders, then repackage them as securities. That frees up mortgage money at the lender level and gets mortgages into hands of investors which normally wouldn't participate in them.) Fannie Mae and its sister organization Freddie Mac (Federal Home Loan Mortgage Corporation) have been trying to get Congressional approval to buy more loans, to help the worsening housing market. So far, thumbs down from the politicians. FNM's announcement comes after Freddie Mac said last week it would raise $6 billion in stock and cut the quarterly dividend 50% to bolster its capital base. So the FNM news isn't really news, rather an anticipated event. Still, the stock sold off intiially. Look for more lenders to follow suit. The market is already pricing in a divdend cut (or so it would seem) in several large financial institutions: Washington Mutual (WM), Countrywide Financial (CFC) and Citigroup (C). Citi added $7.5 billion to its capital structure a week ago but there was no statement of lowering the dividend. That will almost surely happen. CFC sold a convertible to the Bank of America to put $2 billion in its coffers. Maybe that's enough. Most likely not. Still no word of a dividend chop there. The market believes it's definitely coming. Rumors swirl that the company may seek bankruptcy, vehemently denied by the CEO. Finally, Washington Mutual has seen its stock go from $45 a share to $19 (and that's up from its recent low) with no announcement about more capital or a dividend cut. It's just a matter of time. Or so the price would suggest. - Ted Allrich
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