Fannie, Freddie shares slump on bailout concerns

The Journal is reporting Fannie, Freddie bailout is coming over the weekend. 

FNM and FRE dropped 20% after hours. The street is interpreting this as a bad news for Fannie and Freddie equity holder. However, regional banks popped after hours. I own a small position in WaMu sep 5 calls so I’m happy to see that. If the bailout wipe out equity holders of FNM and FRE, what’s going to happen to banks, hedge funds, and other institutions who hold large position in FNM and FRE?

How will you trade this news?

Paulson and company wants to lower the mortgage rate and help set a bottom for real estate decline. But they must do so without upsetting the finance system. If there is a good chance that wiping out equity holders may fold large number of hedge funds, push regional banks over the edge, they will not do it.

Here is what I think. Paulson and the Fed has came up with a plan to restore investor and home buyer confidence, lower the spread Fannie and Freddie pay for their debt, and ya di ya da. That’s not important. What’s important is who is going to pay the bill when it is all said and done.

If tax payers have to flip the whole bill, it is bad news for the dollar and my EUR/USD short position. I think they may somehow find a way to fund the bailout partly with private money. If that’s the case, it will be fun to watch which direction FNM and FRE move Monday. I might jump on FNM and FRE for a trade. My gut feeling is they may not wipe out share holders, but I’m not going to bet my own money on it until I see how the market reacts.

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