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Wall Street Is Stuck With Fannie Mae

In a written statement, Citigroup said the filing "reflects both direct ownership and shares held in mutual funds or other investment vehicles owned by clients," emphasizing that it doesn't actually own all the shares held in its name. The firm declined to discuss further its dealings with Fannie.

Whether it's the bank's money or the clients' money, the value of those 61 million shares has fallen more than $800 million since the first of the year. Though mutual funds that hold large stakes in Fannie are not as intimately entwined with the company as Wall Street investment firms that deal in mortgage securities, the funds face a similar quandary: If they start selling their Fannie shares and word gets out, they could trigger a sell-off that would drive the stock even lower.

_____On The Web_____
The Global Research Analyst Settlement Distribution Funds Web site
The Securities and Exchange Commission's Web page with more details on the Global Research Analyst Settlement.
_____Investing Columns_____
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_____Previous Columns_____
A Telecom Capital No Longer (The Washington Post, Feb 21, 2005)
Few Will Receive Restitution Under SEC Settlement Decision (The Washington Post, Feb 14, 2005)
In the Forecast: Power of Choice For Natural Gas (The Washington Post, Feb 7, 2005)
Tiny SEC Filing Gave a Big Hint To Vastera's Plans (The Washington Post, Jan 24, 2005)
Local REITs May Escape an Industry Downturn (The Washington Post, Jan 10, 2005)
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Dow Over 12 Months
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Nobody wants to be the one who starts a run to dump Fannie Mae stock. But nobody wants to be the one left holding the bag.

While Citigroup and several other Wall Street firms and mutual fund managers have been buying Fannie stock, the stock's performance makes it clear that other big institutional investors have been bailing out. Small investors can't be driving the stock down, because there aren't enough of them to account for the decline. Eighty-five percent of Fannie's shares are held by institutions.

Exactly who's been selling, however, won't be known until April, when mutual funds report what stocks they bought and sold in the first quarter.

The stock began to slide after Fannie Mae announced in mid-January that it was cutting the quarterly dividend it pays to stockholders to 26 cents a share from 52 cents. The dividend cut saves Fannie about $500 million a year, which will be stashed away to protect against future losses, a risk reduction demanded by federal regulators. The lower dividend made Fannie a much less attractive investment to those who buy stocks for income.

"I think the dividend cut was really damaging for Fannie Mae," said Paul J. Miller, an analyst who follows the company for Friedman, Billings Ramsey & Co., the Arlington investment firm. Miller has a neutral rating on the stock and hasn't changed it recently. FBR trades and invests in mortgage securities, but unlike some Wall Street firms, does not manage offerings for Fannie Mae and Freddie Mac.

Federal Reserve Chairman Alan Greenspan triggered a second round of selling by suggesting at a congressional hearing Feb. 17 that the federal government ought to restrict the growth of Fannie Mae and Freddie Mac. The two government-chartered, shareholder-owned mortgage companies help home buyers by providing money for mortgages. Both originally packaged mortgages and sold them to investors, but in recent years they've kept many of the mortgages. The growth in their own mortgage investments, Greenspan said, increases the risk that Fannie and Freddie might get in financial trouble, requiring a federal bailout.

And if whacking the dividend and getting whacked by Greenspan weren't reason enough so sell the stock, Fannie Mae last week fessed up to more financial irregularities. As before, they involve arcane accounting issues, guaranteed to glaze over the eyes of most Washington investors. The details remain devilish, but the bottom line is that Fannie's bookkeeping irregularities are worse than we knew, another reason for prudent investors to be wary.

To believe many analysts, none of those things matter. But based on what's happened to Fannie's stock, they matter a lot.


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