Sep
08

Ten Banks That Will Be Hurt by the Takeover of Fannie and Freddie

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September 8, 2008

The government takeover of Fannie Mae (FNM) and Freddie Mac (FRE) should be a positive for most banks. The deal will lower mortgage rates and will also allow the Treasury Department to purchase mortgage-backed securities from firms in the open market. That will allow a lot of mortgage paper that is currently clogging the system to start moving again. However, several banks will be hurt by the bailout of FNM and FRE because they own a considerable amount of FNM and FRE preferred equity relative to their capital bases.

According to my math, the government will essentially own about 80% of FNM and FRE after the bailout. The current preferred equity will no long pay a dividend until at least 2010. While the preferreds have traded 45% to 65% lower already, they will most likely be completely wiped out from here. If the companies can recover, there might be some value to the common and preferred equity in five to ten years. However, as the companies enter run-off, my guess is that the common and preferred equity will not regain much value.

Some banks such as Valley Financial (VLY) have already announced that they will take a charge for the decline in the value of their FNM and FRE preferred equity. From the Valley National press release:

In the second quarter of 2008, Valley National Bancorp (“Valley”) disclosed that it holds Fannie Mae and Freddie Mac perpetual preferred stock with a cost basis of approximately $79 million. Such securities are held in Valley’s available for sale securities portfolio and as such are subject to a potential other than temporary impairment charge. The estimated fair market value of these securities has declined from June 30, 2008 by approximately $40 million as of September 2, 2008, which if recognized would result in a $25.7 million after-tax impairment loss, or approximately $0.19 per fully diluted average common share for the third quarter of 2008. Valley sold a small portion of these securities during the third quarter, bringing its current adjusted cost basis in such securities to approximately $70 million. The aggregate amount of losses and other than temporary impairment that may be incurred on these securities during the third quarter of 2008 is difficult to determine, given the low trading volumes and the significant volatility in the market values of these securities. Based on management’s current projections, a potential other than temporary impairment and loss on these securities would not impact its subsidiary bank’s (Valley National Bank) ability to maintain capital ratios above the “well capitalized” regulatory requirement, or Valley’s ability to pay its regular quarterly cash dividend to common shareholders.

ARTICLE SHORTENED DUE TO LENGTH….

LINK TO ARTICLE HERE: http://seekingalpha.com/article/94375-ten-banks-that-will-be-hurt-by-the-takeover-of-fannie-and-freddie?source=wildcard

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