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Monday, August 18, 2008 11:23 AM

Fannie, Freddie Bailout To Wipe Out Equity Holders

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Bloomberg is reporting Fannie, Freddie Fall as Barron's Says Bailout Likely.

Fannie Mae and Freddie Mac fell to almost 18-year lows in New York trading on concern the government will be forced to bail out the mortgage-finance companies, wiping out common stockholders.

Both Fannie and Freddie slid as much as 12 percent after Barron's said government officials anticipate the companies will fail to raise the equity capital they need, prompting the U.S. Treasury to step in. Fannie is down 82 percent this year. Freddie has fallen 85 percent.

"It is very, very likely to happen before the end of the third quarter," Ajay Rajadhyaksha, the head of fixed income strategy for Barclays Capital Inc., said in an interview. "Without government help, we think there is very little chance of Freddie completing a significant capital raising."

A rescue would include preferred stock with a seniority, dividend preference and convertibility right that would wipe out common stockholders, Barron's reported, citing an unidentified source in the Bush administration. Treasury Secretary Henry Paulson, who received the authority he requested from Congress to help the companies, has said a bailout won't be needed.

"We aren't going to comment on speculation," said a Treasury spokeswoman, Jennifer Zuccarelli. "As the Secretary has said, we have no plans to use these authorities."

Though the Bush administration was looking to Fannie and Freddie to turn around the U.S. housing market and avert a recession, former Federal Reserve Governor Susan Bies said, "they really are helping to pull the market down rather than being source of strength at this time."

"They are going to be pressed to raise capital in a very weak market, which is going to make the cost of capital very high for both of these organizations," Bies said in a recent interview on Bloomberg.
So much for the SEC's and the Treasury's effort to manipulate share prices higher so that Fannie and Freddie could raise capital without government assistance.

Fannie Mae Daily Chart

click on chart for sharper image

Fannie Mae (FNM) nearly tripled in 5 days but has now given every cent back. A new 52 week low was recorded today at $6.47. Freddie Mac (FRE) is back under $5. So much for blatant manipulation efforts.

Mike "Mish" Shedlock
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