Sunday, July 13, 2008

Will $15 Billion be Injected into Fan/Fred Before Market Opens on Monday?

After a week of near panic among shareholders, the next big test for the GSEs comes Monday when Freddie Mac is due to sell $3 billion of short-term debt. An unsuccessful sale could be a major blow to investor confidence.

As the crisis worsens for mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Henry Paulson is insisting that any potential government rescue plan not benefit the companies' shareholders, according to people familiar with the matter.

The discussions at Treasury highlight the dilemma created by the financial crisis gripping the U.S: Some institutions are considered too big to fail, but propping them up could erode the market's incentive to properly judge risk by offering investors a false sense of security.

In a story broken by the UKTimes online, one of Paulson's plans is to inject $15 Billion into F and F. The move would protect the American housing market, but punish shareholders in both companies. Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders.

And if Fan or Fred go into conservatorship, as many expect them tonight or in the near future? This is what it may look like.

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