The Washington Post reports that Hank Paulson plans to turn the back of his hand to people who hold common shares of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) in his "rescue" plan. But Paulson may bailout the holders of their preferred shares -- which currently pay a dividend yield of about 20%.
Why does Paulson prefer the preferred to the common shareholders? That's because the common shareholders are big mutual funds with lots of small shareholders who have no importance to the economy in his judgment. The preferred shareholders are regional banks whose capital he thinks would sink dangerously if he wipes out their dividend.
Below is a list from the Post of the big Fannie and Freddie preferred holders:
- Regions Financial (NYSE: RF) which has an estimated $200 million,
- M&T Bank (NYSE: MTB) with $161 million, and
- Astoria Financial Corp. (NYSE: AF) with $83 million.
I am not sure why Paulson thinks those banks need to be bailed out. Why can't they just sell the Fannie and Freddie preferred stock they own and buy some other investment with the proceeds? They should be able to afford the investment talent to figure that out. And they should realize that when a security yields 20% and the Fed Funds rate is 2%, there is an enormous amount of risk reflected in that high yield. In other words, if something looks too good to be true, it probably is.
This administration's theme is that the rich and powerful need government help when things go bad and the consumers whose spending makes up 70% of Gross Domestic Product (GDP) growth should pay for that help. And make no mistake, the $800 billion that could be used to bail out Fannie and Freddie will come out of your pocket.
If that sounds right to you -- keep this reverse-Robin-Hood strategy going with your vote in November.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
8-23-2008 @ 1:18PM
william lindblad said...
If you know, the press knows, and trying to sell this idea to the taxpayer may not prove too easy, once they see the tab.
It is obvious what is afoot here, but the average citizen is not going to see this as a "between a rock and a hard place". Either go in this direction or have the FDIC pick up the pieces from the fallout. For the taxpayer it is a no win as either way they get the bill.
If this is to fly, a new approach is in order. Perhaps a % move on the preferred might soothe enough to placate the public and pass Congress. Whatever he does he still has to convince the august body on the hill and they are well aware that John Q. Public is in a rather foul mood. I really don't think any astute politico is going to stick their neck out until after November when they are sure that they have not encountered Madame LaFarge.
8-24-2008 @ 9:15AM
wally said...
Why doesn't he just collect the HUGH CEO salaries and UNDESERVED bonuses
paid out to the incompetent idiots that put them , and the taxpayers, in this situation
8-24-2008 @ 5:42PM
Shaun said...
Anyone who bough Fannie and Freddie lately had to know they were taking a huge risk.
Hopefully anyone who lost money from this was diversified enough so it didn't hurt them too much.
http://www.stocks-simplified.com
8-25-2008 @ 12:12AM
jrwhiterabbit said...
The three banks that he mentions here specifically Regions. They have been counting the income stream associated with that investment. However, I don't know how familiar you are with Regions Bank but it is a common (lets call it Rumor just to give them benefit of the doubt) but if things were not better and they were not capitalized better by year end ....there may be a solvency issue. However, that was before this. Or at least before we realized just how in bed we were with Fannie Mae. Then to top it off you have the lawsuits against the RMK fund and now this. So this only is a little salt on top of the wound. Regions is much more sideways than people realize. There current loans are not in the best shape and more on the bubble.
The CEO we have is accountable for absolute zero *he thinks* and remains an arrogant finger pointer. I suffice to say that we had our issues before the merger with Amsouth but we sure have way more than we bargained for. I once was told that as long as you grow the merger expense will cover up the crap at the bottom...and if you don't believe it ...just wait. ASO did a great job at high jacking a bank to steal it's name. Now we have a bank running the way of Amsouth and looking back over the history ....there is a reason that they have been in trouble with the FED their share of times. The CEO's today care nothing about us small investors...it's not about profitability for the company first. Remember your talking about a bank who borrowed the money to pay the dividend for the first quarter. If you don't believe me look at the amount and timing of the loan at 8.75 percent on preferred securities back around April or May. The bank has no idea a dividend is a profit share and not treated like a current bill. The issue with Fannie Mae is just one of the dumb mistakes they have made and will continue to make as long as the current management is operating the ship.