Sunday, September 7, 2008

Your Only Hope: An Open Letter To Fannie and Freddie Shareholders

Dear Fannie and Freddie Shareholders,

You are screwed big time. I don't know what possessed you to continue to hold Fannie or Freddie common stock in recent weeks, when it was clear that Treasury Secretary Paulson was not going to protect  the common stock in a bailout. You obviously weren't reading EPJ. I warned in July, that common stockholders in the two firms would be diluted down to near zero in the bailout.  Maybe you were reading and following Dean Baker's useless advice.

Whatever the case, the worst still might be ahead of you. The Treasury has rights to a 79.9% stake in your companies for capital infusions of  $1 billion each, but it is very likely that further capital infusions may be required which would  dilute your pitiful stake even further.  

Here's what I would do if I were in your situation.

First, I would study the Chrysler bailout of a few decades back.

In December 1979, the Chrysler Loan Guarantee Act of 1979 was approved by the Senate, by a vote of 53 to 44. The Act provided for $1.5 billion in loan over ten years, provided that the company raised another $1.5 on its own. The act became law on January 7, 1980 when President Carter signed it. Chrysler raised the additional $1.5 billion and brought on board Lee Iacocca to run the company. 

With the appointment of Iacocca to head the company, Chrysler launched an all new advertising campaign, with Iacocca becoming one of the most recognizable businessmen in the world. In 1982, Chrysler became profitable. In August 1983, Chrysler paid off the federal loan guarantees seven years early, at a profit of $350 million to the U.S. government as a result of the government selling the warrants they received as part of the bailout package.

There was considerable talk in 1983 that the government should just give the warrants back to Chrysler, so as to not dilute old shareholders. The public outcry at such a possibility killed the idea, and the Chrysler shareholders experienced some dilution.

So what does all this have to do with you?

Freddie and Fannie are highly leveraged companies which means that when the housing market turns around (and it will at some point), Freddie and Fannie will become very profitable. If you can stop the Treasury from converting their preferred stock, which is where the dilution problem is for you, you are going to make a lot of money.

But to even attempt to stop the conversion, you need to start now to form a lobby group. Your  approach will have to be much more sophisticated than the Chrysler effort. You will need good lawyers, lobbyists , public relations people  and a good economist (uh, my email address is 

There are very good reasons that you can make a case to the public that the current bailout was done to protect foreign governments at the expense of you guys. China alone holds some $300 billion in Fannie and Freddie debt, they are protected and American shareholders are not, what gives? And the government shouldn't be in the bailout and takeover game anyway.

Stopping the Fed conversion is a long shot, but it is the only shot you have.

Good luck,

Robert Wenzel
Editor & Publisher 

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