Market, for once, shrugs off Fannie, Freddie woes

By Kristina Cooke

NEW YORK (Reuters) - An unusual thing happened amid the latest drubbing of Fannie Mae and Freddie Mac shares. The rest of the stock market yawned.

Wednesday was the first time this year that both Freddie Mac and Fannie Mae fell 20 percent or more while the market ended higher. And don't be surprised if that decoupling is just beginning, some analysts said.

"My feeling is that it's been discounted ... that the towel has been thrown in, and everybody is assuming they will be nationalized," said Stephen Berte, senior equity trader at Standard Life in Boston.

Officials from the U.S. Treasury and Freddie Mac met on Wednesday to talk about the company's health and how it can best weather the current economic woes in light of mounting credit losses, sources familiar with the meeting told Reuters.

Anxiety about the companies has risen in recent days following a weekend report in Barron's newspaper that government officials may have no choice but to effectively nationalize Freddie and its larger counterpart Fannie Mae.

"The general market, whether it's right or wrong, has come to the conclusion that the common shares probably don't have much true equity value," said Eric Kuby, chief investment officer, North Star Investment Management Corp in Chicago.

"The stock has already collapsed and has been dragging down the market, but it's got to a point where whether the stock is at $6 or $4 makes no difference, it's essentially just an option price, which indicates that equity investors have given up on the stock."

This shift in the broader market's response to Fannie and Freddie has precedent. Just six months ago, panicked investors threw the market into convulsions as it became apparent that bond insurers MBIA and Ambac would be stripped of their top-notch credit ratings. But by the time the axe finally fell on their AAA labels, they had fallen off the radar and the news barely caused a ripple.

Of course Fannie Mae and Freddie Mac pose an entirely different threat. The two government-sponsored-entities own or guarantee almost half of all outstanding U.S. mortgages and the government is relying on them to help stabilize the worst U.S. housing market since the Great Depression.

Fears about Fannie and Freddie spurred sharp declines in the broader market on Monday and Tuesday, but by Wednesday the stock market seemed to be shrugging off the two home finance companies woes.

In fact financials rose, which some analysts attributed to the view that any bailout would be aimed at saving the housing and mortgage market.

Of the three days this year that both Freddie and Fannie have fallen more than 20 percent, the benchmark S&P 500 index fell 1.1 percent on July 15, and 1.5 percent on August 18. On Wednesday, however, the S&P 500 closed up 0.6 percent.

"I think the sense is that it's got to the point now that something has to be said or done to get some short-term closure for the market," Kuby said.

(Editing by Leslie Adler)