The reporting on the main elements of the Freddie and Fannie rescue plan is converging as the content of official briefings leaks out.
The stunner, which contradicts preliminary reports, is that the preferred shareholders in the GSEs will take losses. The
Wall Street Journal reports that dividends on common will be eliminated and those on preferred will be suspended (
Bloomberg,
Reuters, and the
New York Times were less specific, but indicated that preferred shareholders would suffer).
Justin Fox summarized why this outcome, of wiping our or otherwise damaging the preferred shareholders,
had been considered highly undesirable:
Lots of small and mid-sized banks in the U.S. have, with encouragement from regulators, built up big holdings in Fannie and Freddie preferred stock, which they use to satisfy their capital requirements. If Fannie and Freddie preferred shares become worthless, a lot of banks will become insolvent. Which, with the FDIC insurance fund already being depleted by bank failure, could end up costing taxpayers a ton.
Now admittedly, the preferred shares have already inflicted sizable losses to those who bought them when issued. For instance, Freddie Mac's Z preferred was sold for $25 and has traded in the $10 to $14 range recently. But even at that level, its rich dividend (at these level, the yield is 15%+) is a support for the price. Adjustable rate preferred is
trading at a bigger discount, 80+%. Where do they go once that prop is removed? Readers who can provide insight are encouraged to speak up.