Fannie, Freddie stocks likely to fall after bailout news
September 8th, 2008 | by admin |By Paritosh Bansal
NEW YORK, Sept 7 (Reuters) - The U.S. government’s decisionto grab control of Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz)has one very clear consequence: stockholders will feel pain.
How much they lose and whether either’s current equityholders retain any value in the long term is up for debate, butthe direction for now for both companies’ common and preferredshares is likely down, investors said Sunday in wake of theTreasury Department’s move to place both in conservatorship.
Late Friday, when news of the pending takeover first beganleaking out, both companies’ common shares tumbled. Thegovernment’s action allows shares of both companies to keeptrading but puts common shareholders last in any claims.
“Fannie and Freddie’s common stock should each decline to$1 to $2 early this week as they, predictably, are beingdramatically diluted by the Treasury’s bailout,” said DougKass, co-founder of Seabreeze Partner, who holds positions thatwill profit from declines in the shares. “From my perch, bothstocks move ever closer to zero in the days and weeks ahead.Game over.”
The U.S. Treasury will immediately take a $1 billion equitystake in each company in the form of senior preferred stock andif needed could inject up to $100 billion into each firm.
The government’s senior preferred stock would rank aboveboth existing preferred and common shares and will carrywarrants that could give the government an ownership stake of79.9 percent. The common stock and preferred stock dividendswill also be eliminated.
“If taxpayers lose a penny, the common and preferred shouldand will get wiped out,” Kass said.
The stock of the two companies has fallen more than 90percent in the past year and in recent months foreign investorshave pared their holdings of the companies’ securities.
