Newsflash! Citi and Lehman Downgrade Fannie And Freddie

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The Fly on the Wall reported this morning that "Lehman downgraded shares of Fannie Mae (FNM) and Freddie Mac (FRE) to Equal Weight from Overweight after the U.S. government said it will place Fannie and Freddie into a conservatorship. Citigroup also downgraded shares to Sell from Buy following the federal government’s plan to place the GSEs into conservatorship as they believe both Fannie and Freddie will no longer be managed to maximize common shareholder returns."

Well isn’t that wonderful? Lehman and Citi were telling investors to buy shares at $7 last week and now the stock is at $1 — and they’re kind enough to let us know that we should sell now that they aren’t being run for the benefit of shareholders. That kind of hindsight is truly priceless, or at least valueless. Given that Fannie was presumably being run for the benefit of shareholders all the way down from $68 to $1 (and hopefully 0), it may be interesting to see what happens now that shareholders aren’t the top priority.

But there’s a larger message here about the value of Wall Street’s sell-side research: when you add the long history of analyst research being flawed by conflicts of interest to the fact that companies like Citigroup and Lehman can’t even keep track of their own balance sheets, it might be worth ignoring completely — if Lehman doesn’t understand Lehman, how could it possibly understand Fannie and Freddie? Obviously it didn’t.

Why would Citi and Lehman further embarass themselves by downgrading the stocks, drawing further attention to their bad calls. In a related story, a slew of banks are being sued for failing to warn investors about Fannie and Freddie’s massive risks in a preferred stock offering.

Zac Bissonnette