Three Stocks that are in Trouble

WASHINGTON – Investors are still trading common shares of Fannie Mae, Freddie Mac and American International Group Inc. by the billions, even though analysts say their prices are almost certain to go to zero.

All three are majority-owned by the government and are losing huge sums of money. The Securities and Exchange Commission and other regulators lack authority to end trading of stocks in such "zombie" companies that technically are alive — until the government takes them off life support.

Shares of the two mortgage giants and the insurer have been swept up in a summer rally in financial stocks. Investors have been trading their shares at abnormally high volumes, despite analysts' warnings that they're destined to lose their money.

"People have done well by trading them (in the short term), but when it gets to the end of the road, these stocks are going to be worth zero," said Bose George, an analyst with the investment bank Keefe, Bruyette & Woods Inc.

Some of the activity involves day traders aiming to profit from short-term price swings, George said. But he said inexperienced investors might have the misimpression that the companies may recover or be rescued.

"That would be kind of unfortunate," he said. "There could be a lot of improvement in the economy, and these companies would still be worth zero."

The government continues to support the companies with billions in taxpayer money, saying they still play a crucial role in the financial system.

Fannie and Freddie buy loans from banks and sell them to investors — a role critical to the mortgage market. They have tapped about $96 billion out of a potential $400 billion in aid from the Treasury Department.

Officials have said AIG's failure would be disastrous for the financial markets. Treasury and the Federal Reserve have spent about $175 billion on AIG and AIG-related securities. The company also has access to $28 billion from the $700 billion financial industry bailout.

But analysts say the wind-down strategies for the companies are almost sure to wipe out any common equity, making their shares worthless.

"There are some folks that believe that somehow that 20 percent (of the stock) that's out there in the public market might be worth something someday," said Daniel Alpert, managing director of the investment bank Westwood Capital LLC. But he said the three companies are doomed because they are "massively indebted," and the values of their assets are declining.

The stocks remain in circulation mainly for two reasons: They've violated no rules on the New York Stock Exchange, where they are traded. And no regulator has the power to suspend their trading without evidence securities laws are being violated.

Alpert said no regulations exist to deal with cases where the government props up unsustainable companies.

By contrast, regulators were able to warn investors about stock in the "old" General Motors, which also sits on a mound of government debt. The SEC and the Financial Industry Regulatory Authority, the brokerage industry's self-policing group, have issued alerts and taken other steps to prevent investor losses on that stock.

In that case, the SEC could act because GM acknowledged the stock was headed for zero in a restructuring plan filed with the SEC.

The SEC says it has no reason to suspend trading of stocks that still technically meet its standards, which include filing timely financial reports and disclosing events that could affect share values.

The NYSE's rules include maintaining minimum numbers of shareholders and market capitalization. But they give the exchange full discretion over which stocks are listed — regardless of whether a company meets those listing standards.

FINRA has jurisdiction over NASDAQ-traded stocks and over "pink sheet" stocks, which are worth too little to be traded on a major exchange. It has no jurisdiction over stocks on the NYSE.

Shares of Fannie, Freddie and AIG — along with their trading volumes — have jumped this summer, when activity normally fades as traders take vacations. Fannie shares have more than tripled since the end of July. Their volume soared to 360 million shares Thursday from 6.45 million shares on the last day of July.

Freddie and AIG shares have surged threefold since then. Freddie's volume jumped to 191 million shares from 4.5 million. And 148 million AIG shares changed hands on Thursday, compared with 5 million on July 31.

By comparison, the trading volume of General Electric Co.'s common shares fell to around 63.7 million shares Thursday, compared with 109 million shares July 31. The stock price rose 5.3 percent in that stretch.

AIG shares rose $10.15, or 26.9 percent, to $47.84 Thursday. Analysts speculated the company might be reconciling with former CEO Maurice "Hank" Greenberg, who could help bring private capital and other business benefits to the company.

A reverse stock split in early July raised the price by a factor of 20. In a reverse split, a stock price is increased, and the number of shares are reduced by a similar proportion. It has no effect on shareholders' equity.

Fannie shares closed up 3.8 percent at $1.92 Thursday; Freddie shares rose 10 percent to $2.24.

Fannie and Freddie's government owners haven't announced their plans for the companies. That means there's a possibility — however remote — that their shares could retain some value. But the administration is expected to announce in February that the companies will be wound down, merged into a federal agency or have their bad mortgage assets split into a new government-backed company.

All those possibilities are almost certain to eliminate any remaining shareholder equity, analysts said.

Lawrence J. White, a professor at New York University's Stern School of Business, said the higher trading volumes might reflect speculation about the government's February announcement.

With the share prices still so low, White said investors are willing to bet on the outcome of the government's announcement. He said trading volume is likely to grow further, with even sharper price swings, as February approaches.

Still, Freddie Mac Chairman John Koskinen said the price fluctuations were hard to understand.

"I have absolutely no idea what that represents," he said.

Representatives for Fannie, the SEC, AIG, FINRA and the NYSE declined to comment. Spokeswomen for Treasury, which owns most of AIG, and the Federal Housing Finance Agency, which holds Fannie and Freddie in conservatorship, also wouldn't comment.


by the associated press

Oil hits $74 per barrel on economic optimism

HOUSTON — Oil prices approached $75 a barrel Monday for the first time in 10 months amid growing optimism that the world's economies are on the mend.

Benchmark crude for October delivery rose 73 cents to $74.62 a barrel on the New York Mercantile Exchange. Oil last topped $75 in October.

Natural gas rebounded strongly from new seven-year lows Monday, though prices remained well below $3 per 1,000 cubic feet.

Expectations that demand for energy will grow were spurred Friday by Federal Reserve Chairman Ben Bernanke, who said the U.S. economy is reviving. Bernanke's remarks and signs of improvement in the U.S. housing market sent stock markets higher, and that carried over into the new week.

Even before Bernanke spoke, however, prices had already begun to rise on a large and unexpected drawdown in U.S. oil supplies last week.

Equities appeared to follow energy prices, which took off midweek.

Asian and European markets were higher Monday, and the Dow Jones industrial average rose moderately in early trading.

This time, it appeared energy prices followed equities trading.

"No doubt about it, we're riding the wave of a strong stock market," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "These bullish financial developments have forced a huge amount of passive capital into commodities, especially the oil space."

It's been slightly more than a year since a barrel of crude soared close to $150 a barrel. No one expects another run to those heights anytime soon, but even the prospect of increasing demand is sure to keep upward pressure on oil prices.

In a report Monday, trader and analyst Stephen Schork said once oil gets to $75, "there is not a hell of a lot to prevent it from going to $80 or $85."

Natural gas is another story. Prices are at seven-year lows and supplies continue to grow. Friday marked the 11th session out of 12 trading days in which gas prices fell.

"Demand prospects are the worst they have been in recent memory," said PFGBest Research analyst Phil Flynn.

It has been a very moderate summer and meteorologists are forecasting the same through the fall. That could drive prices down even further if people don't need as much heat for their homes.

Gasoline prices have flattened and few expect a major run on prices as the driving season winds down.

Retail gas prices were almost unchanged overnight, falling to a new national average of $2.626 a gallon, according to auto club AAA, Wright Express and Oil Price Information Service. A gallon of regular unleaded is 14.5 cents more expensive than it was a month ago, but it's $1.062 cheaper than last year.

In other Nymex trading, gasoline for September delivery added 265 cents to $2.0221 a gallon and heating oil for September delivery rose about 2 cents to $1.9246 a gallon. Natural gas for September delivery rose 7 cents to $2.875 per 1,000 cubic feet after tumbling 14.1 cents on Friday.

In London, Brent prices rose 21 cents to $74.40 a barrel on the ICE Futures exchange.



by the associated press