Blue-Chip Trio Played Out of Tune in Third Quarter

Fannie Mae, led by chief executive Daniel H. Mudd, is deliberately shrinking its home mortgage business under pressure from regulators.
Fannie Mae, led by chief executive Daniel H. Mudd, is deliberately shrinking its home mortgage business under pressure from regulators. (By Joe Marquette -- Bloomberg News)
By Jerry Knight
Monday, October 3, 2005

Fannie Mae, Freddie Mac, Marriott International.

They call them Washington's blue chips because, back in the good old days, the blues were the biggest chips on the poker table.

Now, the blues is what stockholders of these local giants are singing after a painful third quarter.

Investors lost money on the stocks of 10 of the 20 largest companies in the region, with Marriott, Freddie and Fannie taking the biggest hits in the three months that ended Friday.

Last Wednesday, Fannie Mae suffered its worst blow since the 1987 stock market crash. Its stock was knocked down almost $5, or 11 percent, by a Dow Jones Newswires report that its accounting problems are even worse than previously reported. Stock in the District-based mortgage giant bounced back more than $3 a share the next day, after old friends on Wall Street came to its rescue.

Not to worry, insisted analysts at J.P. Morgan Securities and Morgan Stanley. Both are major players in the mortgage securities market that do billions of dollars of business a year with Fannie.

"It's not clear that the issues raised in the Dow Jones report would be material," said J.P. Morgan. "Relatively small impact," nodded Morgan Stanley.

Maybe. It's hard to know, given how little has been publicly disclosed about the various inquiries into Fannie, including the accounting investigation being conducted by former senator Warren Rudman. The only new tidbit Rudman offered last week was that his probe might not be finished on schedule in December, but will be done by January.

The friendly analysts could be right. It could turn out that the Wall Street investors who have been dumping Fannie Mae stock and driving down the price simply panicked in the face of uncertainty and made a costly blunder by bailing out.

It will be the middle of next year before Fannie puts out corrected numbers. Based on what happened after a similar accounting investigation at its counterpart, McLean-based Freddie Mac, the stock could rebound once the financial restatement is completed.

But Freddie's rebound was only temporary. Last quarter the stock fell steadily, in tandem with Fannie's. Freddie's stock plunged to $56.46 from $65.23, a 13.4 percent loss. Fannie shares dropped to $44.82 from $58.40, a 23.3 percent loss.

If the percentage losses aren't scary enough, consider how much stockholder money has vaporized. Fannie's stock market value fell about $13 billion last quarter while the total value of Freddie's stock dropped $6 billion.

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