This may help to understand the Treasury's next moves.
The banksters really do not want Fannie and Freddie to be bailed out and maintained in anything such as their current form. They want Fannie and Freddie's business, more precisely the fees from same. They also want the debt to be made whole.
The big banks do not care so much about the preferred stock. In fact, they might even be in favor of a haircut there, to set up some bargains for the coming wave of bank consolidations. But the Fed doesn't like it, because they see the domino risk to the system.
Again, this might help to explain the solutions that comes out of Washington and New York. There is significant maneuvering behind the scenes by the vested interests. Of course then there are the Democrats. Hank has a window of opportunity to settle the GSE's hash before he loses his grip on power. Let's see what happens.
Fannie and Freddie threat to banks
By Saskia Scholtes in New York and James Politi
The Financial Times
August 23 2008 03:00
Small regional US banks could face substantial writedowns if the government has to rescue Fannie Mae and Freddie Mac, the two giant US mortgage financiers.
Regional banks, together with US insurers, hold the majority of Fannie and Freddie's $36bn of outstanding preferred stock, which could be wiped out in the event of a government rescue.
Few banks have taken any writedowns on the preferred shares, which have lost more than half of their value since June 30. This could exacerbate the impact of losses on the preferred shares at a time when many banks are experiencing losses on residential construction loans and home equity portfolios.
Tom Priore, chief executive of Institutional Credit Partners, a boutique investment bank, said: "If the government takes a senior preferred stake, it will crystallise existing losses for the banks and add to them in a way that damages local lenders at a time when they can least afford it."
Fannie and Freddie's preferred stock ratings were cut by Moody's yesterday from A to Baa3. Moody's said the cut reflected the uncertainty surrounding how these securities would be treated if the US Treasury provided Fannie or Freddie with support and the reduced financial flexibility the two companies would have in the event of a Treasury intervention.
The rating agency said it saw the odds of such an intervention as increasingly likely, pushing Fannie and Freddie's stock prices down by a further 14.5 per cent and 8.25 per cent, respectively. Both stocks have lost more than 40 per cent of their market value this week on fears that government intervention is imminent.
"Given the GSEs more limited ability to raise capital and grow their portfolio to accomplish their public policy role in a time of mortgage market turmoil, we believe that there's an increased probability of actual support coming from the US Treasury," said Brian Harris, analyst at Moody's.
The Treasury was granted powers last month to extend its credit lines to Fannie and Freddie and invest in their debt and equity, but it has not given any further clarity on the structure a rescue for the companies might take.
Many analysts believe the most likely option is for the government to get preferred shares as part of any rescue, eliminating the value of common shares, and ranking higher than existing preferred shareholders, who will probably see their dividends cut.
Philadelphia-based Sovereign bank said this week it holds more than $600m in preferred stock issued by Fannie Mae and Freddie Mac, representing 0.78 per cent of its total assets.
Analysts at CreditSights said a full write-off of Sovereign's preferred stock in Fannie and Freddie could represent as much as four quarters of earnings. Sovereign executives warned there was a possibility they could take a significant writedown in the third quarter.
