The Fannie and Freddie Stakes Are High

Fannie Mae and Freddie Mac's capital structures reveal that the U.S. government holds a $348.4 billion senior preferred claim, significantly exceeding the total shareholders' equity of $160.7 billion, meaning in a liquidation scenario, the U.S. government would receive all proceeds, leaving common and regular preferred stockholders underwater by tens of billions of dollars.

Analysis

The capital structures of Fannie Mae and Freddie Mac present a significant impediment for common and regular preferred stockholders. The U.S. government's senior preferred claim amounts to $348.4 billion, a figure that substantially overshadows the $160.7 billion in total shareholders' equity. This disparity means that in a hypothetical liquidation scenario, the entirety of the shareholders' equity would be absorbed by the government's claim, leaving no value for other equity holders. Consequently, common stockholders and holders of regular preferred stock are effectively 'underwater' by tens of billions of dollars. The magnitude of the government's senior position is such that even if Fannie and Freddie's shareholders' equity were to double, it would still fall short of satisfying the government's claim, underscoring the deeply subordinated and precarious position of these junior securities.

Key Decisions for Investors

• Investors should be acutely aware that common and regular preferred shares of Fannie Mae and Freddie Mac carry extreme risk due to the U.S. government's $348.4 billion senior preferred claim, which far exceeds the current $160.7 billion in shareholder equity.
• Prospects for any value realization for common and regular preferred stockholders are minimal under the current capital structure, as these shares are deeply subordinate and would receive no proceeds in a liquidation scenario or even with a significant equity increase short of covering the entire government preference.
• Consider these junior securities as highly speculative, with any potential upside contingent on unforeseen, drastic changes to government policy or the firms' capital hierarchy not suggested by current information.