> These companies are important. Their stock isn't and the common and preferred stock will be wiped out
Maybe, maybe not. The current dilution of the common share to 20% of it's previous value has already been factored into the books, and presumably to some degree in the face value of the share, which is forbidden to pay a dividend until 2010, or thereabouts...
The fed has not sold any common stock to itself yet. Fannie was relatively healthy compared to Freddie at the end, the feds claim they had to take both...
They have a profitable business model. Once the hazy mortgage bonds that cannot be properly valued are cleared from the books, they will make money. $200 Billion in losses, and dilution, has already been factored in.
In addition, it appears Fannie will be aquiring mortgage bonds at a low price from the market. These bonds are probably going to pay off 90% of their original value when all is said and done in a scenario where 10% of folks default on their mortgages, and that is a bad scenario to come to pass... I think we will make money off of this move. Or, the taxpayer will.
The question really rides on 2 factors:
1) How bad will mortgage defaults get? The worse it gets, the more dilution for capitolization may be necessary.
2) What will the fed do with a healthy Fannie, once they are satisfied and done that the company has been stabilized and is healthy?
The second question occupies my thoughts quite a bit. Were we in Russia, or Venezuela, I would say kiss your property good bye for good. But, Paulson has stated clearly the government has an interest in returning some equity value to the former shareholders. They are going to be holding 80% of the company, refreshed, in their one preferred giant share. Do they simply return the company to the previous owners? Do they have a IPO of their share, dividing up their super share, to the general public? Will owners of older shares get dibs on the offering? Will they simply issue .1 or .2 share to all common stcok holders in fnm.ob, or whatever the new symbol might be?
There are many variables. The way I look at it, my downside is low and my upside is potentially considerable. Democrats are in power, and have an interest in seeing Fannie return to what it was in modified form. Worst case scenario, it is diluted to zero, the feds fail utterly in their goal to return some value to the equity holders... and, the fed will have to live with the fact they have undermined confidence in all equities, especially preferred equities. Best case scenario, the common share will retain 20% of it's original value and it's face value will vary as it did before, just at 20% of the previous price.
What is that, you say? Well, it was only paying 5 cents dividend at the end... that would give a face value of around $3.75 cents assuming a reasonable p/e ratio of 15 to 1. Which would make my share worth 75 cents, but this was at the very end after a lot of turmoil.
They paid 30 cents five times per year recently, before the liars loans polluted the mortgage market, so let's say a yearly dividend of $1.50 is reasonable to expect, once the feds sweep house. That would mean my share could still receive 30 cents per year dividend, in a good case scenario. That would make it worth about $4.50, in this scenario.
Assuming the feds redistribute the company to the former equity holders...
And, stocks are often trading well above their real value, and Fannie did at $68, so if you get real enthusiastic and bullish you could persuade your self the common share might return to $15 in five years. No, I do not believe that.
But, I think $2 to $4 of real value is quite reasonable to expect a possibility oif achieving. Since Fannie was relatively healthy, most people are going to pay their mortgages or refinance them avoiding default, the government knows it squashed equity holders and wishes to return some crumbs to them...
Lots of variables... thsi is a lottery ticket. You must be prepared to lose everything. Only bet what you can afford to lose, period. It could go to zero, it could go to $12 or more in a 3-4 year time window... Once the bad paper is timed out and washed out of the system (up to 2 yrs), we can see where Fannie stands on it's balance sheet. And just listen for commentary from the fed about what they intend to do with their 80% stake... I am betting, in America, they will return the company to it's proper owners. They do not have to, remember that.
