Wall Street Is Stuck With Fannie Mae

By Jerry Knight
Monday, February 28, 2005

Fannie Mae's stock finally had a good day on Friday--after a six-day slide that cost its shareholders $6 billion.

As the stock skidded, investors unloaded 35 million shares, driving the stock to its lowest price since the summer of 2000. After a 75-cent gain Friday, the stock closed at $57.70 a share, off almost 19 percent since the first of the year.

Last week continued a downhill trip that began in September, when Fannie Mae revealed that it had indulged in creative accounting. Like Freddie Mac two years ago, Fannie got in trouble for keeping its books in ways that violated standard accounting rules. Freddie's stock had recovered, but for the past two months it has skidded side-by-side with Fannie.

All the way down, Fannie Mae's defenders kept insisting that the problems at the District-based mortgage funding company are in the past, that the stock has fallen too far but soon will bounce back to $80 or even $90 a share.

In their dreams.

Credit Suisse First Boston, which advised clients Friday to buy Fannie's stock and predicted that it is headed to $80 a share, only a month ago was saying the stock would recover to $90 a share. Just last summer the firm told clients that Fannie's stock could hit $105.

Wall Street analysts can't afford to admit they're wrong about Fannie's prospects. They have urged too many people and institutions to buy the stock for them to cut off that limb now.

Wall Street firms make too much money dealing in mortgage securities issued by Fannie Mae to do anything that would hurt Fannie or endanger their business relationship.

And Wall Street has too much of its own money invested in Fannie to put out a "sell" recommendation on Fannie Mae. If the big firms sold their holdings before telling clients to do so, the Securities and Exchange Commission would be all over them. If they told clients to sell before selling their own holdings, they'd hurt themselves.

Citigroup, whose Solomon Smith Barney division repeated its "buy" rating on Fannie stock last Tuesday, has been one of the biggest buyers of the shares. Earlier this month Citigroup reported that it bought more than 50 million shares of Fannie Mae in the last six months of 2004. As of Dec. 31, it owned 61 million shares--a little more than 6 percent of Fannie's stock.

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.

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