Fannie and Freddie: 80%+ dilution

A quick look through the Treasury plan to take over and prop up Fannie Mae (FNM: 7.04 +0.62 +9.66%) and Freddie Mac (FRE: 5.10 +0.15 +3.03%) 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: 0.44 -0.02 -4.35%) 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.