Financial Stocks: Is It Safe Yet?

The Fannie/Freddie takeover has made some pros more optimistic, but individuals may want to think twice about jumping back in

By Ben Steverman

September 9, Business Week

It wasn't hard to find skeptics on Wall Street on Sept. 8, the day after the federal government's weekend takeover of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).

Yes, some investors were reassured by the bold, risky move. They hope it hastens the end of the yearlong financial crisis. The stock market, and financial stocks particularly, moved higher on Sept. 8 (with the notable exceptions of Fannie and Freddie, each of which plunged to below $1).

Yet with a range of problems hanging over America's economy and housing and mortgage markets, most fund managers and market experts interviewed by BusinessWeek said they weren't ready as investors to embrace the embattled financial sector.

Spooked by Bear

Some analysts reacted to the Fannie and Freddie news by upgrading their view on financial firms like Goldman Sachs (GS) and some regional banks.

But by contrast, many other investors cited the Bear Stearns collapse in March, when the Federal Reserve tried to ease the credit crunch by providing liquidity to investment banks. The federal government's actions initially met with Wall Street approval. But the stock market rally was short-lived, and by summer stocks were again tumbling lower.

The best that could be said of the Fannie-Freddie action is that it answers a big question: No, the federal government will not allow these crucial mortgage financiers to fail and potentially cripple the mortgage and housing market in the U.S.

"They've taken a big question mark out of the mortgage market," says Dave Hinnenkamp, chief executive of KDV Wealth Management. "It will stop things from getting worse" for the housing and mortgage industries, says Jeff Layman, chief investment officer at BKD Wealth Advisors.

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photo: Sept. 7, 2008. The U.S. government took control of mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) after investors' confidence in the government-sponsored enterprises tumbled. Fannie and Freddie, which together held nearly $5 trillion in mortgage debt, were unable to raise enough capital to shore up their balance sheets amid the slumping housing market. The Treasury Dept., acting under authority it received from Congress in July 2008, put the companies into conservatorship, ousted both CEOs, and agreed to invest up to $100 billion each in the loss-plagued companies to prevent a failure that could have shocked the already tight credit market. (BW)