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Fannie, Freddie and AIG: Options on survival

With stocks of once high-flying companies trading less than $ 1 for Freddie/Fannie and around $3-4 for AIG reminded me about technology stocks in 2002. I remember stocks like Sonus, Rediff and many other technology companies trading for less than 50 cents. As soon as technology market recovered, stocks of these companies jumped ten-fold in 2-3 years. Of course many technology companies also went bust with no value left for shareholders.

Do we have similar opportunity in some of these stalwarts. Here are my three simple questions which may help understand this:

  1. Would Freddie/Fannie/AIG survive (means no BK or receivership)
  2. Would government (which owns 80%) would let these companies run like any for-profit companies (unlike ones run in socialist countries) and eventually get out of business of running these companies
  3. Is there any value left for common shareholders
If answers to all three questions is YES, then I would say it is worth buying stocks of these companies which are selling at 50-60 cents for Freddie/Fannie or $ 3 for AIG. Essentially one is buying "no expiry" options on these companies.
Potential reward: Could be similar to what surviving technology companies provided post 2002. Potential Risk: You could lose all your investment so you should not over-do it

Looks like with VIX (aka fear index) all the way to 2002 levels, we may have seen capitulation and market bottom - at least I hope so.

Have a good weekend

/Shyam

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