FNM's/FRE's Assets to Be Unwound at 10%/Yr from 2010 On

Biggest suprise was suspending the dividend on preferred. Those are going to be worth near nothing now, and a ton of medium and small sized banks are going to take huge hits to their asset base because of it. Just shifting money from a treasury bailout to an fdic bailout when some of them ultimately fail.

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FNM's/FRE's Assets to Be Unwound at 10%/Yr from 2010 On
Biggest suprise was suspending the dividend on preferred. Those are going to be worth near nothing now, and a ton of medium and small sized banks are going to take huge hits to their asset base because of it. Just shifting money from a treasury bailout to an fdic bailout when some of them ultimately fail.

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When the preferred dividends start getting paid again, will all of the unpaid back-dividends start being paid as well?



What happens to the common stock here? Zero? A few cents?


After reading a bit, what I'm getting is that the stock will be worth next to nothing, definitely no more than a buck or two and maybe much less - but that there is a slim chance some other corporation may offer to buy the entire company (fannie or freddie or both) which might push the stock a little higher than that.

Am I getting it about right?

fannie and freddie stock now only bestow the rights of 1) future governing of the company when the government decides its OK, if ever and 2) future profits after all losses are recouped, if ever.

So its basically not even a share of stock really - its the right to own shares of Fannie or Freddie in the future, should they become available.

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When the preferred dividends start getting paid again, will all of the unpaid back-dividends start being paid as well?

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Almost certainly not. Preferred stock is an equity-debt hybrid. If equity-like dividends are suspended, then you shouldn't get them back. They are not the same as coupon payments on government Treasuries, although I do admit this is a very blurry area. Still, the debt part is different from the equity part.

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What happens to the common stock here? Zero? A few cents?

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Undetermined. There are a million ways that this can be done. Here's one example...

Equity will be used to offset any losses. Perhaps the gov't will loan the GSEs some money, and then make the GSE enter a contract to pay that loan back on favorable terms. In the meantime, the equity owners get no dividends. Starting in 2010, though, they still retain ownership rights to future earnings. However, they will also be placed under new restraints that will draw down the amount of assets the GSEs will be allowed to work with.

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Am I getting it about right?

fannie and freddie stock now only bestow the rights of 1) future governing of the company when the government decides its OK, if ever and 2) future profits after all losses are recouped, if ever.

So its basically not even a share of stock really - its the right to own shares of Fannie or Freddie in the future, should they become available.

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Sounds about right. In the best-case scenario, Fannie and Freddie will be broken up into around 8 completely private mortgage corporations around 2010 or 2011, and stockholders will just get ownership interest in those firms. Nothing is for certain, however.

MileHigh = Herbert Hoover

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I doubt (1) that most of the preferred stocks are owned by failing banks

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I think you're wrong. They are very widely held securities - and a big decline in their value could CAUSE bank failures.

Define "most" then.

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I'm just saying that the ripple effects of this will be felt throughout the banking sector, and it might end up pushing some banks over the edge

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Well, sure, that's fine. But it's not as if bailout money is getting pushed around from one department to another. Only a small fraction of these write-downs will trickle down to FDIC-related payments by the government. I mean, does preferred stock really get the majority of its value from the number of dividend payments expected in the next 16 months? I don't think so.

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I can't envision any world in which this is good for financials in the near term.

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Why not?

Here I would think the opposite. I would fully expect a big upside day/week from this, but ultimately the fundamentals still suck for the sector and they will reflect their real value with time.

"With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares . . . conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses."

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