Secondly - In a wind down/liquidation (which seems to be the government's plan), junior preferred shares could easily be worthless. And in fact, the government is on record as stating that to be their intention. One of their goals, if not in fact their PRIMARY objective, is to ensure that existing equity holders (both common and preferred) get wiped out. The government wants Fannie and Freddie to go away, with their work to be continued under some new legal structure or by some new entity (either the government itself or - more likely - a new corporation they'll then sell off to "new" private investors). Is the likelihood of existing preferred shareholders being paid ANYTHING AT ALL diminishing over time? Absolutely. In a liquidation, shareholders get paid last. The shareholders only get what's left AFTER all creditors have been paid in full. And the government inserted itself into the capital structure as the "super senior" stockholder. So the order for payment in a liquidation will be as follows: 1 - Priority Claims (a small number of statutorily-protected "special interests", for lack of a better descriptor) 2 - Administrative Claims (the lawyers and advisory firms, mostly) 3 - Secured Bondholders/Creditors 4 - Unsecured Creditors 5 - US Government 6 - Junior Preferred Shareholders 7 - Common Shareholders, and those claims will be paid (in order) with the proceeds available from liquidation of the corporation's assets. And that's why the "wind down" (asset stripping) actions of the government during the conservancy are so critical, although no one seems to be making an issue of it. When the companies were "rescued" (ha!), they held $1.6 TRILLION of wholly-owned mortgage assets - most of which were guaranteed by the government either explicitly or implicitly. But they've been required to sell those assets off, and they will all be gone when a "formal" liquidation is commenced. So that's $1.6 trillion that WOULD HAVE BEEN available to pay creditors and then shareholders, but will no longer be available because it has all disappeared during the conservancy. What concerns me is where the money went from the sale of those assets - it certainly hasn't been paid to the government and reported as a dividend payment. And I don't think it's sitting in their bank accounts as "cash", because it would then be considered a part of their capital (would it not?) and would be "swept" - meaning that it would have to be reported as a dividend payment to the government (and it hasn't been). So $1.6 trillion has disappeared, but only ~$250 billion got paid to Uncle Sam? There may be an accounting explanation which makes sense. But if there is, I haven't heard it. I guess they could have plowed the money back into financing new mortgages, and then securitized those mortgages - so it's still on their balance sheets as an asset but now with a corresponding offsetting liability? I find it kind of hard to believe that there have been that many new mortgages issued (in addition to whatever the "normal" annual amount would have been), but maybe it's possible (???). Regardless, the government is in full control of the assets and balance sheet, and they can set the remaining assets to whatever level they want them to be on the date a liquidation is declared. And they've already stated their aim that whatever assets remain will not be sufficient to cover secured and unsecured creditors, AND the government's investment, with anything at all left over for existing shareholders (both preferred and common). In fact, it's somewhat surprising to me that FnF bondholders and MBS holders seem to be so complacent over this situation. They seem confident that there is enough value in the companies for them to be paid in full no matter what happens, but that's placing a lot of faith in the government to act in a way which respects the payment priorities of the capital structure - when they've clearly demonstrated they have no such respect (not for the lower rungs, at least). There's nothing at all to stop the government from stripping the assets down to a level which is sufficient to pay only Priority and Administrative claims, if that's what they wish to do ... How much would one junior preferred share of Fannie Mae stock be worth in a hypothetical liquidation that started tomorrow? Who knows? It would depend on how judiciously the assets were liquidated, and how many claims were submitted (and for how much) by all those higher up the pecking order for payment than junior preferred shareholders. And there's a WHOLE LOT of flexibility in both those things. A share might be worthless now, or it might have some small value. All I know is that it was worth a WHOLE LOT more back in Sep of 2008! And it is becoming worth less and less, with each passing day ...
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