I just saw this news blurb via Bloomberg:

Keefe, Bruyette & Woods cut the price targets of federally controlled mortgage-finance companies Fannie Mae and Freddie Mac to zero today, saying the government needs to recapitalize the two and wipe out shareholders.



Interesting theory, but I think they underestimate the government's willingness to continue throwing good money after bad.

Here are more specifics of what KBW says, via the Bloomberg article:

"The only viable option to limit taxpayer expense and recapitalize Fannie Mae and Freddie Mac is to set up a Bad Fannie and Bad Freddie," analysts wrote in a research note today. The plan would wipe out existing common and preferred shareholders.



That would be true if we weren't talking about government entities. But the federal government hasn't shown much concern about limiting taxpayer expense. I haven't seen many Democrats suggesting that such a drastic solution is being considered, or would be supported. Instead, I would expect more of the same: the government will continue to increase the bailout amount needed for these entities, pretty much ad infinitum.

So where would that leave Fannie and Freddie's stock? Well I think it could still be worth something, kind of in the same way that Citi's and Bank of America's stock are not completely worthless. It's definitely a risk, however, because it's dependent on the whims of fickle politicians. As long as the government is willing to stand behind entities it deems should not fail, then shareholders will benefit. I just don't see Washington conceding the level of defeat for Fannie and Freddie that KBW envisions, but from their research note to God's ears.

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