The uncertainty over when U.S. Treasury Secretary Henry Paulson may step in to use his new powers to recapitalize Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) roiled the financial sector this week. Paulson is also keeping the market guessing on how nationalizing these mortgage giants would look.
The common shares of Freddie Mac fell 46.8% in the five trading days ended Thursday, Aug. 21. Likewise, Fannie Mae crashed 41.1%. If the Treasury Department takes over and judges these companies to be insolvent, the common shares drop to zero.
The big question is, what will happen to the preferred shares? Worries that a government takeover might have a higher claim to assets than the preferred shares, held by upwards of 8,000 banks, sent financial stocks lower this week. Even if the preferred shares survive, their dividends may be cut. ...
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