Investors still trading Fannie, Freddie, AIG shares, even though prices are likely to hit zero
Daniel Wagner, AP Business Writer
Thursday August 27, 2009, 5:36 pm EDT
WASHINGTON (AP) — Investors are still trading common shares of Fannie Mae (FNM), Freddie Mac (FRE) and American International Group Inc. (AIG) by the billions, even though analysts say their prices are almost certain to go to zero.
All three are majority-owned by the government and are losing huge sums of money. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such “zombie” companies that technically are alive — until the government takes them off life support.
Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts’ warnings that they’re destined to lose their money.
“People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero,” said Bose George, an analyst with the investment bank Keefe, Bruyette & Woods Inc.
Some of the activity involves day traders aiming to profit from short-term price swings, George said. But he said inexperienced investors might have the mis-impression that the companies may recover or be rescued.
“That would be kind of unfortunate,” he said. “There could be a lot of improvement in the economy, and these companies would still be worth zero.”
The government continues to support the companies with billions in taxpayer money, saying they still play a crucial role in the financial system.
Fannie and Freddie buy loans from banks and sell them to investors — a role critical to the mortgage market. They have tapped about $96 billion out of a potential $400 billion in aid from the Treasury Department.
Officials have said AIG’s failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 billion on AIG and AIG-related securities. The company also has access to $28 billion from the $700 billion financial industry bailout.
But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless.