Individuals Could Win On Fannie, Freddie Preferreds

Bloomberg's “Fannie, Freddie Preferreds Batter Sovereign, Midwest” takes a closer look at the impact of Fannie Mae (FNM) and Freddie Mac (FRE) preferred stock on regional banks. Banks had liked the GSE preferreds because they can count as regulatory capital and give the banks a tax break. Now the banks face large write downs or possibly total losses on the preferreds, and they might have to raise more capital as a result. Worst case scenario is some banks face such a capital shortfall they might be forced out of business.

Let’s look at the impact of nationalization with the current common equity eliminated. The payment of dividends on preferred could not be justified with the scarcity of capital implied. Even if the preferreds are retained, the market will price them as zero coupon bonds. Remember, most if not all of the GSE preferreds are non-cumulative. At the poi