The Frannie gamble
By Felix Salmon
MAY 29, 2013
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This is a three-year chart of Fannie Mae’s common stock, which fell almost 30% today; it’s now at a level not seen since Friday afternoon. You can think of this as shares “getting destroyed” if you want — but really what we’re seeing here is little more than a game of chicken between traders who find it easier to day-trade from their desks than to jet to the 32nd floor of the Galaxy Macau casino for the weekend.
Every so often the financial markets throw up a security which doesn’t make any sense from an intrinsic-value perspective but which traders love to trade anyway. A large amount of cocktail chatter than springs up around the question of whether this is all just a game, where traders try to second-guess each others’ moves, or whether there might actually be some value buried in there somewhere.
Examples are easy to find: AIG stock circa January 2010, for instance, or credit default swaps on the USA a year earlier. For people who have internalized the efficient markets hypothesis, the fact that such things have value means that there has to be a credible story explaining where that value might lie. And sometimes there is: AIG is now a genuinely valuable company, and shares which were trading at a silly $29 in January 2010 are now trading at a pretty sensible $45.
The Frannie trade is interesting because it’s basically a bet on the US government taking pity on various different classes of shareholder. The common stock is pure gamble, but there’s real money being invested in the preferred stock, which is being held by the likes of John Paulson and Jim Millstein, the man who managed to unlock the value in AIG. Millstein explained the bull case toNick Timiraos:
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