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Wall Street Is Stuck With Fannie Mae

"A stock can only take so much bad news," Miller said. "People are panicking."

"We think the stock is beginning to find a bottom," Miller said Thursday, the day before Fannie's shares began to recover. When Miller talks about Fannie stock bouncing back, however, it's in terms of returning to the $65 range -- not the $80 or more a share envisioned by more bullish analysts.

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Unfortunately for individual investors, some of the analysts criticizing Fannie's stock are short sellers, who hope to make money when stocks fall. They are spreading horror stories suggesting that Fannie and Freddie may be about to blow up. Investors won't just shun the stock, they argue, they won't want the bonds and mortgage securities issued by the two companies either. The result could be a meltdown.

Greenspan dismissed that threat in his congressional testimony, and so do most credible critics.

But it's hard to argue with the cautionary outlook offered by truly independent analysts, such as Josh Rosner of Medley Global Advisors, a specialized research firm with offices in New York and Washington that advises large investors on issues involving regulation, legislation and government policy.

"The market is not properly acknowledging or discounting the problems" at Fannie Mae and Freddie Mac, Rosner said. And by "discounting the problems" he means marking down Fannie's stock to account for them, not dismissing the problems.

Rosner said it's a "hopeless task" to evaluate Fannie's stock in light of the regulatory and legislative problems ahead. Like many analysts, he assumes that Congress will pass legislation this year to create a new federal regulatory agency to oversee the two mortgage giants. Fannie killed that bill last year, but odds are that it will pass this time, perhaps in more punitive form, and perhaps incorporating Greenspan's idea to limit Fannie's and Freddie's growth.

If the legislation passes as written, it would take two years or more to get a new agency off the ground, so Fannie and Freddie face continuing battles with their present regulator, the Office of Federal Housing Enterprise Oversight, and ongoing investigations by the Securities and Exchange Commission and others.

Until last week, investors had reason to believe that all of Fannie's regulatory problems had been aired, but Wednesday's announcement told them otherwise. There is simply no way of knowing whether there are more skeletons to come out of the closet.

Fannie still faces the formidable job, ordered by regulators, of redoing all its financial reports for the past three years. The restatement is expected to result in a $9 billion write-off. Wall Street regards that as simply an accounting change, but Rosner cautions that new accounting, by new auditors, could reveal more losses.

The case for buying Fannie Mae's stock is based on the premise that once the dust settles, everything is going to be all right.

Rosner doesn't buy that. "What comes after the dust settles," he said, "is more dust."

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