New Report Says Feds Growing Increasingly Likely to Recapitalize Fannie and Freddie

From Staff Reports

By availing itself of a new housing bill signed into law last month, the U.S. Treasury Department is growing increasingly likely to recapitalize Fannie Mae (FNM) and Freddie Mac (FRE) in the months to come – all on the taxpayer’s dime, the weekly financial newspaper Barron’s reports in its edition yesterday (Monday).

Both shares took another beating yesterday, as Fannie Mae’s stock slid over 22% with a decline of $1.76 to close at $6.15. Freddie Mac, seen by many as the weaker of the two, fared even worse with a decline of over 24%, as shares shed $1.43 to close at $4.42.

According to the published report, this recapitalization play will likely wipe out the common shareholders of both government-sponsored enterprises. Also suffering losses: The preferred stockholders and the owners of both companies $19 billion worth of subordinated debt, Reuters reported.

According to Barron’s, the capital infusion is envisioned as a sale of preferred stock. These preferred shares would be imbued with such seniority, dividend-preference and convertibility rights that the current Fannie and Freddie common shareholders “effectively would be wiped out, and their preferred shares left bereft of dividends.”

The report labeled the government-engineered equity injection as a quasi-nationalization; it wouldn’t have to put the agencies' liabilities on the U.S. balance sheet, doubling the U.S. debt.

A Bush administration insider told the newspaper that Fannie and Freddie “are being jawboned” to raise more equity by both the Treasury Department and their new regulatory overseer, the Federal Housing Finance Agency (FHFA).

But government officials don't expect the agencies to succeed, according to Barron's.

If the two mortgage giants can’t raise the needed capital, the Bush administration is likely to mount its own recapitalization, with the Treasury Department injecting taxpayer money into the agencies, according to the Barron's source.

Fannie and Freddie each may have a negative $50 billion in asset value, and little prospect of digging themselves out of the hole, Barron's said.

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