RealEstateEconomyWatch.com

Suddenly Fannie Mae and Freddie Mac are behaving like Wall Street Wonders instead of government-run utilities with massive debt and virtually no prospect of ever again operating like private entities.

With the government sponsored enterprises’ stocks worth less than a dollar since the government took them over nearly a year ago, it took only a newspaper report about a leaked memo to send the two penny stocks through the roof.  Unfortunately, investor interest had less to do with the housing economy than Wall Street’s misreading of Washington ways.

The craziness started around noon Wednesday, August 5 after the Washington Post reported that morning that the reported that it had intercepted a White House e-mail by “an administration official” that the government was considering establishing a government-backed “bad bank” to take hundreds of billions of dollars in troubled loans off the books of Fannie and Freddie.

Shares soared for two days until Fannie reported after the bell on Thursday that its net loss increased sharply in the second quarter due to declining housing-market conditions. It also said announced it was asking for an additional $10.7 billion in aid.

To make sure investors returned to reality, Friday the Wall Street Journal  pooh-poohed the GSE mini-rally. “Don’t bet on a revival of Fannie Mae and Freddie Mac,” wrote the Journal’s Peter Eavis. “Since penny stocks like these often move wildly, the rally could mean little. After all, both companies are showing huge losses and have, between them, required $85 billion of taxpayer assistance to stay solvent.”

Then, just as its stock started to return to earth, after the closing Friday Freddie announced a second-quarter profit and, unlike its big sister, wouldn’t need any more government aid, thank you very much.  At one point Monday morning, Freddie’s stock rose 100 percent in pre-market trading and Fannie’s was up 40 percent.

Next month Congress will begin deciding what to do with the GSEs in the context of the Administration’s far reaching reform of financial services regulation.  With key players like Barney Frank and Jim Lockhart talking about turning them into a sort of mortgage finance utility under strict Federal control, quick profits on the stock swings during the August silly season may very well be the last hurrah for Fannie and Freddie’s fans on Wall Street.