It’s not clear what Fannie (FNM) and Freddie’s (FRE) outstanding preferred stock will be worth after the bailout, but the answer could be “close to zero.” The preferred dividends have been eliminated, and the existing preferred is now subordinate to the government’s preferred. Because the companies are likely to need tens of billions of additional capital, moreover, the existing preferred will likely see far more dilution.
So who gets screwed? Banks that own the preferred and count it as part of their “tangible capital” (thanks to a ludicrous accounting rule that allows them to do so). These banks include:
JP Morgan (JPM): $600 million
Sovereign Bancorp (SOV): $588 million (13% of tangible capital)
M&T Bank (MTB)
Midwest Bank Holdings (MBHI)
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