Amid the buzz surrounding a potential bailout, BusinessWeek asks how much the mortgage giants' fall from grace has cost market players—and what losses lie ahead
Talk of a government bailout of Fannie Mae (FNM) and Freddie Mac (FNM) has reached a crescendo recently, including market rumors of a surprise government recapitalization of the mortgage finance companies over the Labor Day weekend, which the Treasury Dept. has denied. In view of a potential rescue of the troubled firms (BusinessWeek.com, 8/22/08), it may be time for a damage report. Here is an assessment of how much wealth holders of the agencies' stocks and debt have lost since the housing crisis began to wreak havoc on the government-sponsored enterprises—and the potential financial damage that may lie ahead for investors.
Losses for holders of the GSEs' common stock are straightforward—roughly $100 billion in market cap has vanished since the start of 2008, with Fannie and Freddie shares down about 85% over the past eight months. Losses for investors in the mortgage giants' preferred shares, which continue to pay hefty dividends, are harder to calculate. Fannie and Freddie each have multiple issues of preferred stock, which vary based on initial share price, number of shares issued, and dividend rates. For example, all of Freddie Mac's preferreds issued in 2007 were priced at $25, while those issued in prior years were priced at $50. The share counts vary, however, and the preferreds now trade at various prices.
Here too, the losses have been significant. Freddie Mac's most recent preferred shares, issued on Nov. 29, 2007, at $25, closed at $12.87 on Aug. 27, translating to a loss of $2.91 billion for those who bought them at the original price.
The Intervention Question
Ultimately, the losses to shareholders will be determined by how Treasury decides to treat the companies' equity if it intervenes to recapitalize the agencies. The market for preferreds is pricing in the risk of some form of government intervention, with some issues trading for as little as 50 cents on the dollar, compared with around 92 cents on the dollar at the end of June, says Sam Caldwell, an analyst who covers regional banks for Keefe, Bruyette & Woods (KBW).
It's mainly individual investors who have borne the brunt of the losses on the agencies' common stock, but regional banks, insurance companies, and other financial institutions have taken the hit on the devalued preferreds, and those with a substantial portion of their capital tied up in these securities can ill afford to have all their value wiped out under a government bailout. Fannie and Freddie preferreds account for at least 32% of the tangible capital held by two regional banks—Gateway Financial Holdings and Midwest Banc Holdings—and 5% or more for a slew of others, according to an Aug. 25 report by Caldwell.
While he believes large-cap banks have limited exposure to agency preferreds, Caldwell found 38 banks with aggregate exposure of $1.3 billion, and 81 other banks that said they didn't hold any preferreds.
A day of reckoning for losses on the agencies' preferreds could be Sept. 30, when firms will need to mark down the value of the assets on their balance sheets to fair market value. A few regional banks have already taken writedowns for other-than-temporary impairment on the preferreds they hold. Earlier this week, JPMorgan Chase (JPM) said the value of its preferreds has been halved to $600 million this quarter and hinted it will take a charge on those assets when it reports third-quarter earnings.
"What's good for JPMorgan should be good for the rest of the industry," says one analyst who covers regional banks and asks not to be named.
Losses for holders of the GSEs' common stock are straightforward—roughly $100 billion in market cap has vanished since the start of 2008, with Fannie and Freddie shares down about 85% over the past eight months. Losses for investors in the mortgage giants' preferred shares, which continue to pay hefty dividends, are harder to calculate. Fannie and Freddie each have multiple issues of preferred stock, which vary based on initial share price, number of shares issued, and dividend rates. For example, all of Freddie Mac's preferreds issued in 2007 were priced at $25, while those issued in prior years were priced at $50. The share counts vary, however, and the preferreds now trade at various prices.
Here too, the losses have been significant. Freddie Mac's most recent preferred shares, issued on Nov. 29, 2007, at $25, closed at $12.87 on Aug. 27, translating to a loss of $2.91 billion for those who bought them at the original price.
The Intervention Question
Ultimately, the losses to shareholders will be determined by how Treasury decides to treat the companies' equity if it intervenes to recapitalize the agencies. The market for preferreds is pricing in the risk of some form of government intervention, with some issues trading for as little as 50 cents on the dollar, compared with around 92 cents on the dollar at the end of June, says Sam Caldwell, an analyst who covers regional banks for Keefe, Bruyette & Woods (KBW).
It's mainly individual investors who have borne the brunt of the losses on the agencies' common stock, but regional banks, insurance companies, and other financial institutions have taken the hit on the devalued preferreds, and those with a substantial portion of their capital tied up in these securities can ill afford to have all their value wiped out under a government bailout. Fannie and Freddie preferreds account for at least 32% of the tangible capital held by two regional banks—Gateway Financial Holdings and Midwest Banc Holdings—and 5% or more for a slew of others, according to an Aug. 25 report by Caldwell.
While he believes large-cap banks have limited exposure to agency preferreds, Caldwell found 38 banks with aggregate exposure of $1.3 billion, and 81 other banks that said they didn't hold any preferreds.
A day of reckoning for losses on the agencies' preferreds could be Sept. 30, when firms will need to mark down the value of the assets on their balance sheets to fair market value. A few regional banks have already taken writedowns for other-than-temporary impairment on the preferreds they hold. Earlier this week, JPMorgan Chase (JPM) said the value of its preferreds has been halved to $600 million this quarter and hinted it will take a charge on those assets when it reports third-quarter earnings.
"What's good for JPMorgan should be good for the rest of the industry," says one analyst who covers regional banks and asks not to be named.
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