And as the Bear Stearns government intervention made clear, any public rescue, if one came at all, would come at a very low price for shareholders.
That a weakening housing market might hurt the two companies, which hold or back about half of the country’s mortgages, might seem obvious now. But as recently as last October, with the housing crisis in full swing, Fannie and Freddie were trading at $60, backed by respected mutual fund managers like William Miller of Legg Mason (Freddie) and Capital Research (Fannie and Freddie).
One longtime skeptic who has had a short position and is willing to talk about it is Douglas Noland, a portfolio manager at the Prudent Bear Funds, a company run by David Tice, a bear market investor.
Since the late 1990s, Mr. Noland has been publishing research and telling anyone who might listen that Freddie and Fannie would suffer greatly when the United States credit bubble eventually burst. It was a prescient call that might be cause for celebration, but Mr. Noland says he has felt no such joy.
“I am sickened by this,” he said by telephone from his Dallas office as he watched the stocks of Fannie and Freddie plunge 12.7 percent and 21 percent, respectively, on Thursday. “I had the same sick feeling after September 11. These companies are at the heart of the United States financial system of dollar based securities. Millions of people will suffer.”
Mr. Noland argues the standard refrain of the short seller. Fannie and Freddie, even more so than Bear Stearns, are dependent on the confidence of the marketplace and immediate access to short term credit markets in order to support its mountain of debt. “I just don’t see how they can grow if the market is losing confidence,” he said.
He describes the research he has written over the years as an effort to educate people, although it could be said that his bear market musings also served his fund’s purpose by spreading a view that would eventually benefit the Tice funds. “It’s a terrible thing,” he said. “I wish we could have stopped this from happening.”