The Bush Administration and Congress have stepped up talks on how to save Fannie Mae (FNM) and Freddie Mac (FRE), the WSJ says. Failure of the two government-charted mortgage giants is not seen as imminent (how nice), but the stocks plummeted again yesterday and are now back to levels not seen since the early 1990s.
The government is discussing several bail-out options, including (cringe) a direct equity investment. Regardless of who puts the money in, Fannie and Freddie will likely have to raise billions of new capital, and this will likely come at the expense of existing shareholders.
Given that the mortgage crap on both companies’ balance sheets is likely worth a lot less than it was at the end of last quarter, the companies’ capacity to raise additional debt is uncertain. So that likely means massive additional equity dilution.
Fannie Mae’s market cap has now fallen to $15 billion, Freddie’s to $7 billion. So it wouldn’t take much additional equity issuance for current shareholders to again get reamed. After the criticism the government received for bailing out Bear Stearns at $2 a share, it seems unlikely that they’ll risk further outrage by stemming FNM and FRE stockholder losses, especially if Washington makes the investment.