Jim Rogers: Fannie Plan a `Disaster’; Goldman Says Sell

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

“They’re ruining what has been one of the greatest economies in the world,” Rogers said. Bernanke and Paulson “are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.”

July 14 (Bloomberg) — The U.S. Treasury Department’s plan to shore up Fannie Mae and Freddie Mac is an “unmitigated disaster” and the largest U.S. mortgage lenders are “basically insolvent,” according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson‘s request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies’ shares may fall another 35 percent and lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17. Freddie Mac fell 64 cents, or 8.3 percent, to $7.11 in New York Stock Exchange trading, while Fannie Mae fell 52 cents, or 5.1 percent, to $9.73.

“I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers, 65, said in an interview from Singapore. “So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation.”

The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a “long way to go” and advised buying agricultural commodities.

`Solvency Crisis’

Rogers, a former partner of hedge fund manager George Soros, predicted the start of the commodities rally in 1999 and started buying Chinese stocks in the same year. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include “Adventure Capitalist” and “Hot Commodities.”

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Billionaire investor Soros said today that Fannie Mae and Freddie Mac face a “solvency crisis,” not a liquidity one, and that their troubles won’t be the last financial disruption, Reuters reported.

“This is a very serious financial crisis and it is the most serious financial crisis of our lifetime,” Soros told Reuters in a telephone interview. “It is an idle dream to think that you could have this kind of crisis without the real economy being affected.”

`Going Bankrupt’

Fannie Mae and Freddie Mac each surged more than 20 percent in pre-market trading today after Paulson moved to stem a collapse in confidence in the two companies that purchase or finance almost half of the $12 trillion in U.S. home loans.

Fannie Mae‘s market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac‘s market value has shrunk to about $5 billion from $22 billion at the end of last year.

“These companies were going to go bankrupt if they hadn’t stepped in to do something, and they should’ve gone bankrupt with all of the mistakes they’ve made,” Rogers said. “What’s going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What’s going to happen three years from now when the situation’s much, much, much worse?”

Paulson’s proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.

The Federal Reserve separately authorized the firms to borrow directly from the central bank.

`The Right Thing’

Anyone who says the mortgage-finance companies should be left to fail is “silly,” hedge fund manager Barton Biggs said in an interview on Bloomberg Television from New York.

“Fannie and Freddie are way too big and way too big a part of the mortgage system and really the American way of life to say `Just let them go bankrupt,”’ said Biggs, a former Morgan Stanley strategist who now runs the hedge fund Traxis Partners LLC. “The Treasury, in my view, is doing the right thing.”

Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.

Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company’s net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.

Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally. Short sellers borrow stock and then sell it in an effort to profit by repurchasing the securities later at a lower price and returning them to the holder.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

“They’re ruining what has been one of the greatest economies in the world,” Rogers said. Bernanke and Paulson “are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.”

To contact the reporters on this story: Carol Massar in New York at cmassar@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.

Last Updated: July 14, 2008 16:13 EDT

Source. Bloomberg

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