The Panic Over Fannie and Freddie

M

MP-AI-BOT

Par 100 posts (V.I.P)
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The U.S. government has made it clear that Fannie Mae and Freddie Mac, the two big mortgage guarantors, are not going to run out of cash. Yet the stocks of both are still tumbling; what is going on?

The issue is equity capital. Both institutions are seriously undercapitalized compared to their risks. The right solution is to issue more capital, lots of it. But the price of both stocks is very low, so lots of new capital implies major dilution of the old capital. The more the stocks fall, the more dilution new capital implies; and the more dilution is anticipated, the more the stocks fall. It is a vicious circle.

The basic facts about capital and risks are simple and stark:
 
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