PhillyDeals: Well-known names among the living dead of Wall Street

"Zombie stock" means an obscure company that has lost all its profit-making assets but whose stock still trades, on the desperate hope that some neglected remnant - a lawsuit, a brand - could one day rise again. Like Philadelphia's PSFS Bank.

But today, some of the nation's best-known companies - among them recent refugees from the elite Dow Jones industrials list - have gone zombie as well.

Investors have propped Liquidation Motors Inc., the toxic-waste remnants of former Dow stalwart General Motors Corp. It was left behind when the good parts of GM were reorganized, but still has a share price of nearly $1 and a market capitalization of $500 million, even though the people who run Liquidation Motors warn it is not worth anything.

Ex-Dow member American International Group Inc. showed zombie signs last week when it rose about one-third in value on a few hopeful comments from its new boss. At least AIG still owns some lucrative businesses; it may not yet be worth the $45.33 a share it closed at yesterday, but it is not worth zero.

But the scariest of Wall Street's living dead may be the nation's housing-finance stocks.

Fannie Mae (an ex-Dow stock) and Freddie Mac each topped $2 last week in New York Stock Exchange trading, the highest since they collapsed last September. Last night, they were worth a combined $18 billion.

That's $78 billion less than what they owe taxpayers, who bought controlling stakes in Fannie and Freddie to keep them from going insolvent as home-loan losses soared last fall.

They're likely to owe a whole lot more, soon.

"There is no fundamental value remaining in Fannie Mae and Freddie Mac, particularly since the government owns 80 percent of each company," analyst Paul J. Miller Jr. and his colleagues at brokerage Friedman, Billings, Ramsey & Co. Inc. warned clients in a report yesterday.

"We expect more government capital injections" on top of the $96 billion already invested, they reported. "This capital must be repaid" if Fannie and Freddie are to survive, let alone have anything left for shareholders.

Fannie and Freddie each have less than one-third the capital they need to cover their loan losses, by Miller's calculation.

And their loan losses are rising. "You're looking at default rates at 3.5 percent and growing 0.2 to 0.25 percent a month," Miller and company reported. That is on a $1.6 trillion home-loan portfolio that includes a lot of subprime loans, and they are picking up more defaulted loans every month from private lenders that Fannie and Freddie insured, Miller told me in an interview.

If these were banks, they would probably be shut by regulators. Instead they are in lockdown mode, still funding new home and apartment-building loans.

What will happen?

"The administration is keeping discussion about [these government-sponsored enterprises] behind closed doors," Miller told investors. "The most likely scenario is that the GSEs operations will be split up, and Fannie and Freddie will be spun out [by] the government as mortgage insurers with small portfolios."

Federal Housing Finance Agency Director James Lockhart, through his spokeswoman, declined to comment.

"Obama's team will not [deal with] the issue until after the fiscal year 2011 budget is delivered, at the earliest," according to Miller.

What will the feds do? Miller doesn't expect a complete government takeover, because the government would have to measure all the bad debt, and put the loss on its own books, which are already strained by the roaring deficit.

"The only value these companies will have is what the government will give them when they spin them off," Miller told me. He doesn't think that'll be much.

Liberty Property Trust, the Philadelphia-based real estate investment trust best known locally for building the Comcast Center, is up 47 percent so far this year, compared with 7 percent for the battered REIT business as a whole, notes David AuBuchon, REIT analyst at Baird & Co., of St. Louis.

And that is enough for now, AuBuchon adds. He cut his Liberty rating to "neutral" from "outperform." AuBuchon sees Liberty stock going to $28, below yesterday's closing of $32.77.

Indeed, AuBuchon sees six of 12 office REITs he likes well enough to track as overpriced in this summer's reheated market. Exceptions include BioMedix Realty Trust Inc., Alexandria Real Estate, and Douglas Emmett Inc., which he upgraded to "outperform."

Liberty "has done great this year, on an absolute and a relative basis," AuBuchon told me. There has been "significant improvement [to] the company's balance sheet," although "some work remains." Occupancy (excluding newly bought or sold properties) is a respectable 91 percent, but it is "a difficult operating environment," AuBuchon said.

In sum, AuBuchon told me, Liberty "is just a bit ahead of where it should be right now."