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An opportunity in a Fannie bailout? Add to ...

Many observers believe that the common shares of Fannie Mae and Freddie Mac are the last things to invest in these days, since a government bailout of the deeply troubled U.S. mortgage-finance companies will probably send the shares to zero. On the other hand, long-term debt is seen as a reasonable bet, since it is essentially backed by the U.S. Treasury.

But what about the swampy middle ground, the preferred shares?

According to the Barron's article that began the latest round of Fannie and Freddie fretting, the preferred shares will lose their distributions and therefore follow their common share cousins into the ground. The market certainly believes this is a distinct possibility, since preferred issues have been hammered.

However, the Accrued Interest blog isn't so sure preferred shares should be lumped in with common shares.

"Remember that the big preferred shareholders are smaller banks," said the anonymous author of the Accrued Interest. "I don't think it would make sense for the administration to bolster one part of the banking system (Fannie and Freddie) at the expense of another part of the banking system (regional banks)."

If the author is right - or, more important, if the administration follows his or her logic - then there may be a compelling argument to be made that Fannie and Freddie preferred shares are a tempting bet, if a tad risky. The Fannie Mae floating preferred shares traded a notch above $7 (U.S.) on Tuesday, down from $25 last October. They have fallen 30 per cent in August alone.

 

 

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