KBW's Plan for GSEs Leans on Big Banks

NEW YORK (TheStreet) -- An analyst report Monday didn't say anything new by calling Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote) "worthless," but its proposal for recapitalizing the two mortgage-finance giants would have negative implications for the big banks that benefit from their guarantees.

Analysts at KBW downgraded Fannie and Freddie to underperform from a previous market perform rating, and cut the price target to $0, saying the common and preferred shares of both companies "should be worthless."

By noon, Fannie and Freddie's speculative stocks were trading down 15% at $1.24 on volume of more than 120 million and 14.5% at $1.46 on volume of more than 60 million, respectively. Over the past year, Fannie's shares have traded in a range of 30 cents to $2.13, and Freddie's stock has traded from 35 cents to $2.50. Turbulent trading in both issues reached its recent peak in August.

However, the most interesting and new information was not the analysts' valuation of the companies. Since federal regulators put Fannie and Freddie into conservatorship in September 2008, they've received nearly $100 billion in government support, will likely need additional funds in the quarters ahead, and don't look like they'll be able to repay those taxpayer debts any time soon.

What was new, however, was a proposal from KBW for the two firms to be restructured into a "cooperative of banks." Members would have to retain 5% of any loans that Fannie or Freddie purchase as an equity investment in the agencies, thereby indirectly recapitalizing the firms.