Fannie and Freddie Common Shares Sink: Financial Losers

NEW YORK ( TheStreet) -- Common shares of Fannie Mae ( FNMA) and Freddie Mac ( FMCC) on Wednesday were the big financial losers among major U.S. financial stocks.

Fannie Mae's common shares were down 28% to close at 78 cents, after rising 80% over the previous two days. Freddie Mac's common shares also sank 28% to close at 78 cents, following a gain of 71% over the previous two trading sessions.

Investors seem to buy the notion that Fannie Mae's preferred shares are a better deal than the common, as the company figures out whether it will be able to recapture a major portion of its $61.5 billion valuation allowance for deferred tax assets (DTA). That would go quite a long way toward redeeming $116.1 billion in preferred shares held by the U.S. Treasury for bailout assistance to the company.

For example, Fannie's preferred series E (FNMFM) shares were up 60% to close at $11.20, after rising as high as $17 late Thursday morning. The preferred Series E shares had risen 34% on Tuesday. The Fannie Mae preferred series E shares have a coupon of 5.10% and a par value of $50.00.

Freddie Mac's preferred series Z (FMCKJ) shares, with a coupon of 5.375% and a par value of $25, actually pulled back 1% to close at $3.16, after rising 6% on Tuesday.

Both Fannie and Freddie were taken under government conservatorship by the Federal Housing Finance Agency in September 2008. The shares of both companies have been extremely volatile since Wall Street Journal called attention to a filing last Thursday, when the Fannie said it would delay filing its annual 10-K report to the Securities and Exchange Commission, specially to consider the DTA issue.

Please see TheStreet's extensive coverage of Fannie and Freddie for more about why the preferred shares are better play for investors than the common shares by the numbers, and for various legal reasons.

Some investors have been comparing the conservatorship and government bailout of Fannie Mae and Freddie Mac to the successful bailout of American International Group ( AIG), which turned out to be quite profitable for the U.S. Treasury and for taxpayers. TheStreet's Dan Freed on Thursday discussed why Fannie and Freddie differ from AIG.

Antoine Gara covered the nuts and bolts of how the government structured bailout approaches for several companies, including General Motors, AIG, Fannie Mae and Freddie Mac, keeping the door open for DTA recapture.

Turning away from Fannie and Freddie, the Dow Jones Industrial Average was down 0.5%, while the S&P 500 ( SPX.X) and Nasdaq Composite indices each saw declines of 1%, as investors continued to worry over the bailout prospects for banks in Cyprus.

After several weeks of improving unemployment reports, the Department of Labor on Thursday said first-time unemployment claims for the week ended March 16 rose by 2,000 from an upwardly revised 334,000 the previous week. Still, last week's initial jobless claims came in below the average estimate of 342,000, among Economists polled by Thomson Reuters.

The KBW Bank Index ( I:BKX) was down over 1% to close at 56.47, with all but two of the 24 index components showing declines.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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