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It now appears almost certain that the federal government will takeover Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The amount of money the Treasury will have to put into the companies to improve their balance sheets will probably wipe out common shareholders.
The news may foreshadow what will happen to Lehman Brothers (NYSE: LEH) if its gets into more trouble The value of its commercial loan portfolio and mortgage-back securities is bound to fall as the real estate market gets worse.
Several outside investors, including Japanese broker Nomura and the Korea Development Bank, may pump money into Lehman. It is not good news that no one has pulled the trigger on putting up cash. All of the interested parties are probably waiting for Lehman's next quarterly earnings report. If the numbers are bad the value of Lehman's stock, which has gone from a 52-week high almost $68 to $16, could fall further.
The lesson from Freddie and Fannie (and, to some extent, Bear Stearns) is that the Fed and Treasury do not care about common shareholders. They get to go down with the ship.
Douglas A. McIntyre is an editor at 247wallst.com.
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Reader Comments (Page 1 of 1)
9-07-2008 @ 8:37PM
mike hulgin said...
How in the World can the Fed leave shareholders holding the bag that had a little something in it ? And now the bag is going to B an empty bag full of Federal Air !!! If Paulson had a bag full of Common stock, do U believe that things would shake out like they R now ? I can't believe what's happening, and I damn sure don't like it. That will B all !!
9-07-2008 @ 9:25PM
JOHN said...
I think the Fed did the right thing
9-07-2008 @ 9:44PM
Harris said...
Can someone please explain to me the meaning of this sentence: The amount of money the Treasury will have to put into the companies to improve their balance sheets will probably wipe out common shareholders.
How do common shareholders get wipe out?
9-07-2008 @ 11:06PM
AncientRvr said...
This is very interesting. When other countries' governments take a privately run company, like the oil companies in Venezuela a while back, they call it nationalization. It's a socilaist concept which our republican administration seems to be availing itself of. The shareholders get nothing when the government takes it over. Freddie and Fannie were essentially privately run government enterprises, an odd neither "fish nor fowl " entity. I am not sure there was any alternative. Although frankly, if businesses are too irresponsible to manage themselves and the taxpayer dollars buy them out, as in this case we will be doing for quite some time given the 5 Trillion price tag, shouldn't the tax payers then own them?
9-07-2008 @ 10:32PM
AncientRvr said...
We are going from a situation where deregulation allowed the unethical activities that collapsed the mortgage industry. Bear Sterns bail out cost the tax payer mightily and has contibuted hugely to the deficit accumulated so far this year. After all, our biggest US bank here was just bought by Dubai last winter for 11 Billion which will now be receiving revenues of 11 million a year in interest from the US credit card holders. At least if we buy our own debt we pay ourselves the interest. The only thing about that is that we are paying it with taxes that we haven't even collected yet and will be collecting for some time.
9-07-2008 @ 10:41PM
AncientRvr said...
The only solution to this is that stock holders monitor and hold their CEO's accountable for ethical behaviours and good business practices and perhaps stop awarding CEO's that run companies into the ground with things $38 million dollar separation packages as the Fannie/Freddie CEO has been rewarded. Perhaps the shareholders should demand some of his gains for his doing such a disastrous job.