Fannie Mae?

Benjamin Graham often wrote of distinguishing the difference between investing and speculating. Fannie Mae, in its current state, sits in the speculating bucket. Investing has to fun though, sometimes it is interesting to window shop, so lets look.

Evaluation based on Buffet’s Criteria

When looking at a business I often ask myself what other investors would think? So lets apply Buffett’s criteria and see if we can’t look at it through his eyes.

Understandable First Class Business

The business is fairly simple, it buys mortgages from banks, bundles them and sells them off as larger financial components. This allows banks to clear debt off their books, and allows FNM to profit with relatively little investment. They are essentially an understandable business- if they are first class is a question that can be left to the reader to decide based on their perceptions of responsibility for the housing crash.

Sustainable Competitive Advantage

Their is a huge moat around this business, the only competition with Fannie Mae is Freddie Mac a smaller and similarly structured GSE business. With the credit crisis, and the amount of capital required to enter into this market it is unlikely new competition would emerge overnight.

Able and Trustworthy Managers

Not going to score any big points here. The majority of those that were directly responsible for the FNM’s role in the housing crash are gone, or are on the way out. This leaves a rag tag crew lead by Michael J. Williams a man who’s previous posts included managing technology and enterprise operations, ethics (nice work there Michael), and Corporate facilities and security (was he the guy checking id badges at the front door?). An investor has good reason to pause and question Michael’s ability to manage this new role.

Bargain Price

FNM is trading at well under a dollar, given its history this is a price that winds the stock back over 20 years.
Price alone doesn’t indicate a bargain. For something to be a bargain it has to be valued cheaper than its actual worth- and FNM isn’t actually worth much. There simply aren’t earnings at the current point nor is there any indication that there will be any time soon. FNM has accumulated a massive amount of debt since its September flop, and the the US government in bailing them out has been clear that it intends to be repaid for its investment, plus interest.

It is unlikely also that FNM will be able to continue to do business in the same way as it once did. Prior to government intervention it was highly leveraged, they had a debt to equity ratio of between 70 and 90 to 1 prior to the government placing FNM under conserveratorship. This is well in excess of the 50 to 1 ratio that several banks were so sternly chastized for having.

What would Buffet Think?

I think this is a stock that Buffett would push off his desk. Their is a chance Fannie Mae will survive and prosper due to its moat. Their is also a chance that the government will fold up the business and build a new structure in its place. what do you think?