Fannie And Freddie Shares To Suffer 80%+ Dilution

A quick look through the Treasury plan to take over and prop up Fannie Mae (FNM) and Freddie Mac (FRE) show that although common and preferred shareholders will not be completely wiped out, their holdings will be seriously devalued and diluted:

• First, dividend payments on both the common and preferred shares will be suspended.
• Second, in exchange for a $1 billion capital infusion, the Treasury will get senior preferred shares with a 10% coupon to be paid quarterly.
• Third, the government will receive warrants representing 79.9% ownership of each company.

You can see where the 80% dilution for the common shareholders comes from. With the current share prices down 90% from a year ago, this effectively, completely wipes out the market value of the two companies. Will either or both of these stock trade under a $1.00 tomorrow? Or has this devaluation already been accounted for by the market. The WSJ stock quote shows both down over 20% in Friday’s after market. This reminds me of the bailout that Thornburg Mortgage (TMA) was forced to accept from private investors to save the company and dilute the common shareholders by over 90%.

The on-going future of Fannie and Freddie will be up to the new Congress and President in 2009. At this time I hope these actions are positive for the housing market and a result in a significant decrease in mortgage rates. This would be a positive for the economy as a whole.

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