The bailout of Fannie Mae (FNM) and Freddie Mac (FRE) should ease concerns about the companies’ survival. The fate of FNM and FRE shareholders, however, is still in question.
- Allowing the GSEs to borrow from the New York Fed, which should forstall any immediate liquidity crisis, and,
- Asking Congress to approve an emergency bill to:
- Increase the GSE’s credit line with Treasury (reasonable)
- Allow Treasury to buy stock in the GSEs (extreme move, possibly unprecedented)
- Strengthen regulation of the GSEs
These moves should head off an immediate liquidity crisis: If Fannie and/or Freddie can’t roll their paper in the private market, they can hit up the New York Fed. This access alone should make the private market more willing to buy their paper.
The GSEs also now have a source of equity capital, one that is likely to be far less demanding investor than a private investor would be. This should ensure that the companies can maintain their required capital ratios, no matter how much money they end up losing on their mortgage portfolios.
Taken together, these moves mean that Fannie and Freddie aren’t likely to suddenly go belly up, a la Bear Stearns.
That said, their stocks could still get hammered from here. If the companies are forced to raise more capital, which seems likely, they will likely have to do so on highly dilutive terms.
Fannie Mae’s market cap is now down to $10 billion, Freddie’s is only $5. Raising even a few billion dollars, therefore, would be highly dilutive to existing shareholders. Although the potential for a liquidity crisis is small, therefore, FNM and FRE stockholders have plenty more nailbiting to do.