Agency Preferred Stocks: Who's Buying?

It is now nine months since the Agencies were put into receivership. It is pretty clear that there is $200-400 billion of embedded losses. By any reasoning and analysis the common stock of both Freddie Mac (FRE) and Fannie Mae (FNM) are worthless. But they still trade actively in the 50-60 cent range. This is a different situation than the old GM common. Old GM shares are worthless. The courts say so.

The status of FRE/FNM common is not as clear. Technically the shares still represent a claim on the companies. The claim is valid and worthless at the same time. As with any bankruptcy, this matter must be addressed at some point. If for no other reason than to eliminate the voluminous public disclosure requirements of the NYSE, the common stock’s status should be resolved. It should be de-listed. 

To do this you must address all of the pieces of the Agencies balance sheets. The status of the senior debt obligations was addressed nine months ago. All of the Senior debt is money good and functionally guaranteed by Treasury. The status of the Subordinated debt is also now clear. As of July 13, 2009 Goldman Sachs (GS) is buying in all the sub debt for FRE in a tender offer. Incredibly, the terms are that the subordinated creditors end up money good with a fat premium. No doubt but that FNM will announce a buy back of its subordinated notes in the near future. The only unresolved liability category is the Preferred stock that is outstanding.

Freddie Mac currently has 20 different categories of preferred shares outstanding. FNM has a similar number. Both companies relied heavily on Preferred stock issuance to support their capital ratios. There is approximately $60 billion of par value securities in the market. The original investors mistakenly thought the Pref. stock was functionally ‘guaranteed’.

In the last week of June someone started buying the Agencies Preferred stock. 






The following is a more detailed chart of the Fannie Mae Preferred S compared to the FNM common. Note again that the prices more or less tracked until June 26. What is clear is on that day someone started buying the pref. and shorting the common.



It has been my contention that it is not legally possible for the Sub debt to be paid in full while the Pref. gets nothing. There is no equity to that. It opens the door to lawsuits.

The tender offer for the Sub debt was agreed to weeks before last Friday’s official announcement. GS is running the books on that deal so they and the others in the deal (Bank of America (BAC) and Citicorp (C)) were well aware of the move by the Agencies to resolve the status of their balance sheet components. It is not a great leap to think that the timing of the jump in the Pref. value was consistent with the finalization of the terms for the Sub debt buy back.

My guess is that by the end of the year the status on the Agency Common and Preferred stock will be legally resolved. The common stock will be worthless. The Preferred stock is going to be tendered for. My guess on that price is in the $5-10 range.

Should that come about, the “smart money” that started buying the Pref. and shorting the Common on June 26 will be getting fat. I wonder who that could be?


A copy of the offering document for Fannie Mae’s last Preferred offering, Note:

• $2 bil. of this swill was sold to the public five months before going into receivership. They offered 8.25% to the suckers. This deal was sold with a wink and a nod. (“the governments behind it and the yield is super!”)
• Note the underwriting fees, .7874%. That came to $63mm for Wall Street. Two years prior, FNM sold Pref. with a .25% fee. That $63mm is big bucks for a Pref. deal that was rated A+ at the time.
• Goldman Sachs is on the middle bottom of the list of underwriters. This means they were the smallest takers of this (crammed down) deal. They did not keep what they got stuck with. They probably did not sell what they got to in-house customers. They knew this was toxic.