Freddie Mac Shareholders to Get (Dean Baker) Baked

So much for all those who misinterpreted the statements of Treasury Secretary Paulson, by believing that Paulson said he was going to step in and support the price of Freddie Mac and Fannie Mae stock.

The misinterpretations included a doozy by Dean Baker, who specializes in finding minuscule errors in economic reporting (A pimple on an elephant kind of stuff). No problem finding Baker's errors though, they are like nuclear bombs going off by accident. Chernobyl has nothing on this guy. Baker actually headlined his error after I pointed it out in the comment section of an earlier post he made. The headline on the Baker post:

Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

He then wrote:

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level.

We responded to his post this way:

I have not seen anywhere, where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.... Anyone reading Baker's posts, and buying Fannie or Freddie stock based on Baker analysis that the Treasury is bailing out shareholders could very well get baked big time.

The baking is about to began.

In its earnings press release today, Chairman and CEO Richard Syron stated:

We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate.

The current market cap of Freddie s $4.2 billion and heading south fast. A raise of $5.5 billion at current levels(The stock is trading at 6.50 per share) would require an offering of approximately 840,000,000 shares. There are currently approximately 647 million shares outstanding. Thus a raise at current levels would require an increase in the number of shares outstanding by approximately 129%.

That's if Syron can pull it off on his own. And, Syron will discount the stock as much as he has to get the deal done, since he doesn't want Treasury to step in and buy stock. If the Treasury steps in, the price could be significantly lower than the current bad news price.

UPDATE: Here's how bad things really are for stockholders: “Either investors are going to be massively diluted given the amount of equity they are going to need or they are going to be nationalized,” Dan Alpert, managing director of Westwood Capital LLC in New York, told Reuters. “Without a larger equity capital base, they are going to be incapable of surviving. We don’t think $5.5 billion even scratches the surface.”