NEW YORK (Reuters)- The U.S. Treasury is growing increasingly likely to recapitalizeFannie Mae and Freddie Mac in the months ahead on the taxpayer’s dime,Barron’s reported in its August 18 edition.
The weekly financial newspaper said that such a move could wipe outexisting holders of the agencies’ common stock, with preferredshareholders and even holders of the two entities’ $19 billion ofsubordinated debt also suffering losses.
An insider in the Bush administration told Barron’s that Fannie andFreddie "are being jawboned" by the Treasury Department and their newregulator, the Federal Housing Finance Agency (FHFA), to raise moreequity.
But government officials don’t expect the agencies to succeed, Barron’s reported.
If the government-sponsored enterprises fail to raise fresh capital,the administration is likely to mount its own recapitalization, withTreasury infusing taxpayer money into the agencies, according to theBarron’s source.
The paper reported the infusion would take the form of a preferredstock with such seniority, dividend preference and convertibilityrights that Fannie’s and Freddie’s existing common shares "effectivelywould be wiped out, and their preferred shares left bereft ofdividends."
The report called an equity injection by the government aquasi-nationalization — without having to put the agencies’liabilities on the U.S. balance sheet, and thus doubling the U.S. debt.
After accounting for deferred tax assets and generous asset marks,Fannie and Freddie each may have a negative $50 billion in asset value,and little prospect of digging themselves out of the hole, Barron’sreported.
(Reporting by Ed Tobin, editing by Richard Chang)
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