A share of Fannie Mae (FNM) goes for $6. Freddie Mac’s (FRE) shares are at just above $4. The market caps of the two companies combined is only about $9 billion.

The most recent estimate of the balance sheet and earnings problems at the two agencies is that they will have to raise $100 billion. The quasi-governmental operations have $223 billion in bonds maturing on September 30.

Fannie Mae and Freddie Mac are not without assets. According to Bloomberg, "Freddie had $70 billion of cash and non-mortgage investments on June 30 and $470 billion of agency mortgage securities that it could pledge for secured borrowing."

The Treasury could put new capital into the two companies by buying new preferred shares, which would destroy the value of common shares entirely. While the government does not feel any obligation to help the stockholders of the two entities, it might handle a new financing in a way that would not completely wipe out the poor souls who have their life savings in one or both of the stocks.

Treasury could take the asset bases of the two companies and make loans with liens on those. Pessimists could make the argument that potential liabilities overwhelm those assets, but that depends to a large extent on the direction of the mortgage market. The federal government could always call on the liens if that becomes necessary.

The government cannot save the common shareholders of Freddie Mac and Fannie Mae, but it could structure a financing which gives them some hope that a modest recovery in housing would eventually place some value to their investments.

Douglas A. McIntyre

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