Seabreeze's Kass dismisses Mudd, keeps GSE shorts

NEW YORK (Reuters) - Hedge-fund manager Doug Kass reiterated on Wednesday that the seriously depressed shares of Fannie Mae and Freddie Mac will drop even further, dismissing comments from Fannie's chief executive that the housing finance company has more capital than ever.

Daniel Mudd told National Public Radio on Wednesday that when Fannie reported its results at the end of the last quarter, "we had more capital than we've ever had at any point in our history."

Kass shrugged off the comment, saying said Fannie's capital is insufficient relative to its exposure in mortgages.

"What Mudd didn't say is that the company is too leveraged to a depreciating asset -- housing -- and losses are off the charts and no signs of stability," Kass, founder and president of Seabreeze Partners Management, said in an interview.

"That is a toxic combination," he added.

"The companies leveraged up their capital to the point that they have created systemic risk," Kass said. "During the period they leveraged up, the price of housing began to level off and ultimately tanked," to an extent few expected.

Mudd said in the radio interview that "it's the capital that buffers you and holds you in a good safe and sound position against those losses."

Wednesday, shares of Fannie and Freddie plunged to their lowest in 18 years or more, while the mortgage finance companies bonds rallied on belief that a government bailout that would wipe out shareholders but secure their massive debt is increasingly likely.

Kass said he believes there will be "some de facto government rescue" of the companies, probably in the form of a series of terribly dilutive financings.

Kass said his last short sale on Fannie was made at $31.50 per share while Freddie was sold at $30.48. In a short sale, investors borrow shares and sell them, banking that the stock price will fall. The goal is to buy them back at a lower price and return them to the broker at a profit.

Freddie's share slumped more than 24 percent on Wednesday to $3.15, the lowest since 1990, and Fannie shares slid more than 21 percent to $4.74, the lowest since 1989.

Freddie Mac's shares closed on Wednesday down more than 22 percent to $3.25, and Fannie Mae's stock settled on the day down 26.79 percent at $4.40.

Kass said he believes the shares will go to zero.

(Reporting by Jennifer Ablan;)