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Commentary

Freddie Mac. Fannie Mae to be taken over, by the Treasury

The U.S. treasury is likely to take over Freddie Mac and Fannie Mae:

Under the plan, which could prompt one of the most sweeping government interventions in financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies’ common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares might be protected by the government.

Shares are likely to go to zero, or close. After-hours trading shows at 20% drop in each of their share prices.

The plan isn’t very clear since it only involves the treasury covering losses, and there’s not much mention of fresh investment or for growing the business. If FRE/FNM business does not grow, the real estate market in the US is hosed anyhow. This idea only protects against too much PAST damage.

This will have worldwide repercussions. A lot of worldwide funds will be looking nervously at these developments – and yes, we in India will definitely be impacted.

Note: In the US, there’s a difference between common and preferred stock – preferred is the equivalent of Indian debentures. Common is what is listed, and that is likely to be wiped out. The preferred is likely to be protected either all the way, or to a certain part, based on how the conservatorship will be structured. Details available soon, I guess.

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