Fannie Mae, Freddie Mac shares rise

Original Link: http://www.examiner.com/a-1553706~Fannie_Mae__Freddie_Mac_shares_rise.html

Shares of Fannie Mae and Freddie Mac soared Monday after Freddie completed a $2 billion debt sale and a Wall Street analyst said a government bailout of the mortgage finance giants may not be inevitable.

But some regional banks with significant holdings in Fannie and Freddie preferred stocks followed the rest of the market down amid questions over whether the government would step in to rescue the two government-sponsored companies.

Shares of Fannie rose 25 cents, or 5 percent, to $5.25 in afternoon trading, while Freddie climbed 39 cents, or 13.9 percent, to $3.20.

Freddie's sale of $2 billion in short-term debt Monday was well received on Wall Street, but the company had to sweeten terms of the offer to lure demand, investors said.

Citigroup analyst Bradley Ball said Monday that federal bailouts "don't necessarily wipe out all" company shareholders, and that Fannie and Freddie still have options despite their steep stock declines in recent weeks.

"We are not convinced that (the government) needs to take any action over the near term," Ball wrote.

Regional banks with the largest exposure to Fannie and Freddie preferred stock as a proportion of their capital include Sovereign Bancorp Inc. (SOV, News), Westamerica Bancorp and Gateway Financial Holdings Inc. (GBTS, News), according to a research note from Samuel Caldwell at Keefe, Bruyette & Woods.

All of those banks' shares were down in afternoon trading.

A government rescue of Fannie and Freddie - whose share prices have plunged in recent weeks as they struggle with billions of dollars in losses from bad mortgages - could be costly for scores of investment, banking and insurance companies that hold billions in their preferred shares.

Preferred shares usually pay a fixed dividend and have priority over common stock when it comes to dividends and bankruptcy liquidation. While slightly riskier than bonds, which have the highest priority in times of trouble, companies often invest in preferred shares for certain tax advantages.

Still, on Wall Street, Fannie and Freddie's existing preferred shares are trading like junk bonds, yielding around 17 percent to 19 percent instead of around their 6 percent dividend levels. The higher yield is an inducement to investors to accept the higher level of risk that the dividends won't be paid.