Freddie Fawning Ignores Bailout Facts - TheStreet

When, in the course of business media events, it becomes necessary for one media critic to dissolve the intellectual bonds that connect investors to a really dumb thought and to assume among the powers of the earth...

Oh forget it. I don't want to get carried away just because it's a spring Friday. But did you see the ridiculous claim, representative of many others on the subject, that went largely unchallenged in a

New York Times article

on

Freddie Mac's

(FRE)

miserable quarter?

I need to get to the bottom of it and might need your help, because rallying that stock on comparison to

Bear Stearns

(BSC)

ignores an expensive point of fact.

Here's the deal: Freddie Mac reported

better than expected earnings on Wednesday

, though in a way that made you want to watch your wallet. Accounting changes. We don't have to go through the gory details here -- there might be children in the room -- but let's get to that quote, one that represents an article of faith about Freddie Mac and

Freddie Mac

(FRE)

other financial companies and should obviously be put out of its misery ... and ours.

They Just Don't Get Freddie Mac!

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Here is the quote, which was prominently showcased toward the top of the article, from the founder of a research firm:

"Both Freddie Mac and Fannie Mae these companies are clearly going to be insolvent by the end of the year, but everyone knows that Congress will do anything to keep them afloat, because if Fannie and Freddie go under, the entire global financial system will melt down. These companies' earnings don't matter. Their accounting hardly matters. People buy the stock because they believe the federal government will bail them both out if things get really bad."

See? Earnings don't matter. Accounting contortions don't matter. They are unofficially designated as "Too Big to Fail" by the United States government so they won't. Just like Bear Stearns, which got a government assisted bailout from

JPMorgan Chase

(JPM) - Get Report

.

The

Times

, in conventional journalistic mode, quickly gave Freddie Mac the chance to deny that it'll be insolvent, but on automatic pilot (if someone says something bad about someone else, give the "else" a chance to respond) they missed the larger point.

The story is about how the stock went up, despite the woebegone accounting issues, because of investor confidence that the

Fed

has Fannie and Freddie's back. Here are the second and third sentences:

"Yet investors cheered the results anyway, and pushed the company's shares up by more than 9 percent, to close at $27.25. The company's regulator, which only a month ago chastised Freddie Mac for questionable accounting policies, also recognized the results by reducing the size of the company's financial safety cushion. Much like its rival Fannie Mae, whose share price rose last week after it reported enormous losses, Freddie Mac's performance on Wednesday reinforced the idea that investors have become convinced that Freddie and Fannie are too important for either to fail."

This all begs a simple question: Are traders dumber than a Mississippi eel?

Or is attributing the stock's strength to investor confidence in a government-supported takeover an all-but-made-from-thin-air description of why the stock went up?

After all, it's pretty simple here, or should be. Does the market really move a stock up 9% because the government might now give the equity holders a couple of bucks if things go really bad? Does this not mean, with the benefit of such misguided hindsight, that Bear holders should have been buying the stock at $20?

Remember boys and girls: With Bear, it was a take-

under

, not

over

. And whether it was take-under at the initial price of $2 or the later price of $10, government support provided a low floor ... and exactly zero reason to drive the stock up.

What is going on here? Help me to solve this terrible mystery. But whatever you do, don't follow the lead of this article and jump into Freddie and Fannie, despite all the accounting squall, in heady anticipation of a takeover.

At the time of publication, Fuchs had no positions in any of the stocks mentioned in this column.

Marek Fuchs was a stockbroker for Shearson Lehman Brothers and a money manager before becoming a journalist who wrote The New York Times' "County Lines" column for six years. He also did back-up beat coverage of The New York Knicks for the paper's Sports section for two seasons and covered other professional and collegiate sports. He has contributed frequently to many of the Times' other sections, including National, Metro, Escapes, Style, Real Estate, Arts & Leisure, Travel, Money & Business, Circuits and the Op-Ed Page. For his "Business Press Maven? column on how business and finance are covered by the media, Fuchs was named best business journalist critic in the nation by the Talking Biz website at The University of North Carolina School of Journalism and Mass Communication. Fuchs is a frequent speaker on the business media, in venues ranging from National Public Radio to the annual conference of the Society of American Business Editors and Writers. Fuchs appreciates your feedback;

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