Shares of Fannie Mae (FNM) and Freddie Mac (FRE) slumped to 18-year lows after a Barrons source explained how the government planned to bail them out:
Should the agencies fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises, according to our source. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie’s and Freddie’s existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends. Then again, the administration might show minimal kindness to preferred shareholders; local and regional bankers have been lobbying the Bushies not to wipe out the preferred since the bankers own a lot of that paper and rely on the bank preferred-stock market for much of their own equity capital.
An equity injection by the government would be tantamount to a quasi-nationalization, without having to put the agencies’ liabilities on the nation’s balance sheet, and thus doubling the U.S. debt. Treasury would install new management and directors at both, curb the GSEs’ sometimes reckless investment and guarantee operations, and liquidate in an orderly fashion the GSEs’ troubled $1.6 billion in on-balance-sheet investments. Then the companies could be resold to the public without their explicit government debt guarantees, or folded into government agencies like Ginnie Mae or the FHA.
But wait. Aren’t Fannie and Freddie still insisting that they have enough capital? Yes, and these claims now border on ridiculous. And with the FNM and FRE market capitalizations now having shrunk far below the amount of capital they’ll likely need, raising equity has become, well, challenging. Which makes the bailout appear imminent.
A Freddie Mac spokesperson, meanwhile, says that Barrons is overstating the company’s woes. Not sure why she bothered. Doesn’t seem too many people are listening.
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