The latest word is that the Treasury bailout will take the form of quarterly capital injections and the removal of billions of dollars-worth of mortgages from the Fannie/Freddie balance sheets. It’s actually not clear that shareholders will get wiped out under this scenario. Unless the Treasury buys equity at a tiny fraction of the current level and, thus, dilutes current shareholders beyond recognition, it’s possible the stock could eventually recover.
UPDATE 2: More details in the WSJ:
Treasury won’t necessarily make a large injection of capital immediately into the ailing companies… the Treasury will stand ready to provide capital as needed, depending how quickly losses deplete the companies’ meager capital holdings.
Dividends on the companies’ preferred stock are likely to be suspended… and those on common shares to be eliminated. Any injection of capital by the Treasury would likely greatly reduce or wipe out the value of common shares currently outstanding. [Not clear what happens to preferred]
The conservatorship will involve the departure of Daniel Mudd, Fannie’s chief executive officer, and Richard Syron, Freddie’s chairman and chief executive, though they may not leave immediately and could help with the transition. The FHFA will have to appoint conservators to run the companies and try to restore them to financial health. Officials of the companies were meeting Saturday with regulators to learn more details of the plan, which appears to have come as a surprise to their senior executives.
UPDATE: NYT: Fannie Mae and Freddie Mac agreed on Saturday afternoon to the Bush administration’s plan to rescue them, people briefed on the plan said. Under the plan, the Treasury Department will buy billions of dollars in new mortgage securities issued by the companies and inject an unknown amount of capital into them in quarterly installments, according to these people.
EARLIER: Fannie (FNM) and Freddie plunge as the government tells the CEOs that it plans to seize the companies. The deal is expected to nearly wipe out common and preferred shareholders. It is expected to be announced on Sunday.
The impetus for the bailout was reportedly the Treasury’s discovery that Freddie overstated its capital cushion.
New York Times: Senior officials from the Bush administration and the Federal Reserve on Friday informed top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, that the government was preparing to seize the two companies and place them in a conservatorship, officials and company executives briefed on the discussions said.
The plan, effectively a government bailout, was outlined in separate meetings that the chief executives were summoned to attend on Friday at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced, shareholders would be virtually wiped out, but the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said…
Under a conservatorship, the remaining common and preferred shares of Fannie and Freddie would be worth little, and any losses on mortgages they own or guarantee could be paid by taxpayers. A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets.
Why the Treasury is acting now:
[A]s the companies’ stocks continued to languish and their borrowing costs rose, some within the Treasury Department began urging Mr. Paulson to intervene quickly.
Then, last week, advisers from Morgan Stanley hired by the Treasury Department to scrutinize the companies came to a troubling conclusion: Freddie Mac’s capital position was worse than initially imagined, according to people briefed on those findings. The company had made decisions that, while not necessarily in violation of accounting rules, had the effect of overstating the companies’s capital resources and financial stability.
Indeed, one person briefed on the company’s finances said Freddie Mac had made accounting decisions that pushed losses into the future and postponed a capital shortfall until the fourth quarter of this year, which would not need to be disclosed until early 2009. Fannie Mae has used similar methods, but to a lesser degree, according to other people who have been briefed.
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