Fannie Mae (FNM) and Freddie Mac (FRE) on the Verge of Government Takeover
The government has finally had enough with Fannie Mae (FNM) and Freddie Mac (FRE). The two companies have always had questionable capitalization — ever since they first were named private “government sponsored enterprises” decades ago. And now the capitalization has become downright ridiculous. The very reason that Fannie and Freddie could be questionable in their capitalization is about to come to pass — everyone assumed that if something went wrong the government would bail the companies out. (The government certainly made an effort, though, with the housing relief bill.)
A bailout plan has been put in motion now. But probably not in the way shareholders would have liked or envisioned. This is to be a straight government takeover, not a government brokered deal like Bear Stearns. Indeed, the New York Times explains the differences between the two cases:
With Bear Stearns, the government provided guarantees, and the bulk of its assets were transferred to JPMorgan Chase, leaving shareholders with a nominal amount.
Under a conservatorship, the common and preferred shares of Fannie and Freddie would be reduced to little or nothing, and any losses on mortgages they own or guarantee could be paid by taxpayers. Shareholders have already lost billions of dollars as the stocks have plunged more than 80 percent this year.
Fannie and Freddie investors have already lost quite a bit of money, as you can see from the charts below:
From 52-week highs above the $60 mark to lows below the $5 mark, Fannie and Freddie have certainly suffered rather large losses — and their shareholders are about to suffer even further. And taxpayers may suffer as well if mortgages the two giants own fail.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
Tags: Fannie Mae, Freddie Mac, investing blog, FNM,
FRE, investments, government takeover
