Raise Capital
Before any privatization, the companies would need to raise “a great deal” of capital along with repaying the government, Ralph Axel, a Bank of America Corp. analyst, wrote in a March 15 report. New shares would dilute existing holders and the Treasury sweeps of their profits will keep their net worth at no more than $3 billion, a figure that will fall to zero over time. Fannie Mae said in its annual report it owns or guarantees $3.1 trillion of debt.
Regulators who took Fannie Mae and Freddie Mac into conservatorship in 2008 didn’t create an avenue for them to regain independence. President Barack Obama and Democrats and Republicans in Congress have pledged to wind down and replace the two companies instead.
About half of small and regional banks who held Fannie Mae and Freddie Mac preferred shares when they were taken into conservatorships still own them, said Paul Merski, chief economist at the Independent Community Bankers of America. More than 600 U.S. depository institutions suffered at least $8 billion of investment losses, after the lenders ended up as large holders in the stock because of its favorable regulatory treatment, according to a paper last year by Federal Reserve researchers.
Their advocacy for the assets to retain value in any restructuring of the U.S. mortgage-finance system may help hedge funds in Washington. “The community banks have good standing and reputation with policy makers,” Merski said. “They didn’t contribute to the financial meltdown.”
‘Zero Support’
Ed Mills, an analyst at FBR Capital Markets said there’s “zero support” among politicians to have the government- sponsored enterprises come back to life and that the firms’ profitability will face further challenges as they’re forced to shrink. Investors have still been calling him more often about the trade over the past few weeks.
“There’s a lot of momentum behind this,” said Mills, adding he’s spent about 20 hours on the phone discussing it. “Ultimately, as GSE reform is completed, in that bill, the chance that nothing is given to the shareholders is high.”