Fannie, Freddie stocks likely to fall after bailout news

By Paritosh Bansal

NEW YORK (Reuters) - The U.S. government's decision to grab control of Fannie Mae and Freddie Mac has one very clear consequence: stockholders will feel pain.

How much they lose and whether either's current equity holders retain any value in the long term is up for debate, but the direction for now for both companies' common and preferred shares is likely down, investors said Sunday in wake of the Treasury Department's move to place both in conservatorship.

Late Friday, when news of the pending takeover first began leaking out, both companies' common shares tumbled. The government's action allows shares of both companies to keep trading but puts common shareholders last in any claims.

"Fannie and Freddie's common stock should each decline to $1 to $2 early this week as they, predictably, are being dramatically diluted by the Treasury's bailout," said Doug Kass, co-founder of Seabreeze Partner, who holds positions that will profit from declines in the shares. "From my perch, both stocks move ever closer to zero in the days and weeks ahead. Game over."

The U.S. Treasury will immediately take a $1 billion equity stake in each company in the form of senior preferred stock and if needed could inject up to $100 billion into each firm.

The government's senior preferred stock would rank above both existing preferred and common shares and will carry warrants that could give the government an ownership stake of 79.9 percent. The common stock and preferred stock dividends will also be eliminated.

"If taxpayers lose a penny, the common and preferred should and will get wiped out," Kass said.

The stock of the two companies has fallen more than 90 percent in the past year and in recent months foreign investors have pared their holdings of the companies' securities.