by Calculated Risk on 8/21/2008 09:46:00 AM

"FNM and FRE should just have a new single consolidated ticker: FUBAR"
Reader BR

From the WSJ: Fannie, Freddie Fears Stifle Stocks

Investors are increasingly concerned about the possibility of a federal bailout that could wipe out holders of the companies' common equity. The uncertainty swirling around the government-sponsored enterprises also may complicate the companies' efforts to win new financing to buy mortgages. Freddie and Fannie have been forced to pay higher yields to investors in recent debt offerings.

If Fannie and Freddie stumble, it could further cripple the U.S. housing market, a troubling scenario for banks and brokers already struggling under the weight of soured mortgage investments.

To me, it seems that bond market participants are trying to force Paulson's hand. That is why Freddie and Fannie have had to pay more in recent debt offerings.

My initial reaction to the rescue plan was: "It seems the plan is bad for equity holders, but good for debt holders ... and potentially bad for taxpayers.". That still seems right. I'm not sure what the equity holders expected.

From Bloomberg: Paulson's Fannie-Freddie `Bazooka' Shakes Investors

The powers Paulson won from Congress last month enabling a government rescue of Freddie Mac and Fannie Mae -- authority he likened to a weapon whose mere existence made it unlikely it would have to be fired -- may end up making a bailout more likely, say analysts and investors.
...
``The common shareholders will probably be completely wiped out,'' Paul Miller, an analyst at FBR Capital Markets, said in a Bloomberg Television interview. ``Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.''