STOCK MARKET RECOVERY? Beware Of The Zombie Stocks – Brisk Trading In Companies That Are Worthless

 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 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 false impression 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. 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. The 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. The shares would be 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. The three companies are doomed because they are “massively indebted,” and the values of their assets are declining, Alpert said.

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 halt their trading without evidence that 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.

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 from 6.45 million shares on the last day of July to 470 million shares per day in mid September.

Freddie and AIG shares have surged threefold since then. Freddie’s volume jumped to 169 million shares from 4.5 million. And 27 million AIG shares changed hands on mid september days, compared with 5 million on July 31.

By comparison, the trading volume of General Electric Co.’s common shares fell to around 66 million shares per day in mid September, compared with 109 million shares July 31. The stock price rose 5.3 percent in that stretch.

http://www.delawareonline.com/article/20090828/BUSINESS/908280321/1003/rss01/-Zombie-stocks–trading-briskly

http://articles.moneycentral.msn.com/Investing/CompanyFocus/4-zombie-stocks-better-off-dead.aspx

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