Fannie and Freddie Shareholders: What to Do Now
By Alex Dumortier, CFA
June 16, 2010 | Comments (21)
At the beginning of May, I warned investors that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) shares were worthless. Today, the Federal Housing Finance Agency, which regulates both firms, has directed them to delist their shares from the New York Stock Exchange. On the back of that news, the shares lost more than half their value at points today. If you own these stocks, what are the next steps?
The process begins
The delisting will not occur immediately, but once it does, the stocks will trade on the over-the-counter bulletin board (OTC BB), a network of "market-makers," securities firms that are willing to buy and sell the shares. You should still be able to trade them through your online broker.
Nevertheless, there are substantial costs associated with trading on the OTC BB. One study, based on a sample of shares delisted in 2002, found that the spread between bid and ask prices tripled in percentage terms and share volatility doubled. In that regard, now is as good a time as any to ask yourself if you want to continue speculating on these shares or whether it's time to cut your losses and move onto something with a better expectation of a proper return.
The failed hybrid model
Fannie and Freddie, which were privately owned with a public mission to encourage home ownership, proved to be an unstable hybrid. Now that they are squarely under government conservatorship, it is right that their shares should no longer trade on a national exchange: The companies are no longer being run for the benefit of shareholders, not to mention that the shares are worthless and purely a vehicle for speculation.
An honest speculation
This situation differs from another firm that also received tens of billions of dollars in government support, AIG (NYSE: AIG). This is what I would term an honest speculation: Although it may be tricky to put a number on it, AIG's equity has value and management is working to maximize it.
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