Fannie, Freddie (FNM, FRE) Lower As Barron's Suggests Common Holders Will Be Wiped Out
Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are down 10% and 11%, respectively, this morning following a negative Barron's article which suggested that common stock holders will likely be left with nothing.
According to the magazine, it is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead, using its recent powers granted to it under the housing bill signed last month. They said such a move would almost certainly wipe out common stock shareholders and even preferred shareholders and holders of the GSEs subordinated debt could suffer losses.
Barron's highlights the problem balance sheets of both GSEs, and says, on a fair-value basis, that Freddie would have had a negative net worth of $5.6 billion and Fannie's equity eroded to $12.5 billion, which isn't much of a cushion for the $2.8 trillion book of owned or guaranteed mortgage assets.
Barron's said the fair value reported by the companies may in fact overstate the value of the assets significantly and by some calculations the GSEs are in the hole $50 billion each.
The article says with lagging stock prices there is little chance of success of a equity offering, since $10 billion or more would be needed each to have any credibility. In addition, the $7.2 billion in equity raised by Fannie in the second quarter has been mostly wiped out already. Any new equity raised wouldn't last long as losses mount. Also, a preferred stock offering would seem to be cost prohibitive for Fannie and Freddie given the yield on their preferred has soared to 14%.
Barron's said a Treasury recapitalization would likely take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie's and Freddie's existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends. They suggest the preferred holders might be saved, since bankers own a lot of that paper and rely on the bank preferred-stock market for much of their own equity capital.
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