Fannie Mae's Earnings: Awful

Fannie Mae's stock is certain to tank today, and not necessarily for the obvious reason. Yes, its quarterly loss of $2.5 billion was much larger than expected. Yes, total shareholder equity evaporated at an even larger pace: it was was $38.8 billion as of March 31, down from $44.0 billion at the end 2007: a drop of a staggering $5.2 billion in one quarter. But much more immediately, Fannie Mae announced a $6 billion capital raise, including $4 billion of equity today alone.

A large chunk of that $4 billion is going to come from the issuance of something called "non-cumulative mandatory convertible preferred stock," which is a flavor of convertible bond. Now buyers of convertible bonds are a specialized stock, and they always short the stock when buying the bond, especially when they're buying a mandatory convert, which is essentially a form of equity issuance.

It's almost as if Fannie Mae was trying as hard as it could to push its stock price down today: not only releasing atrocious quarterly results, but at the same time also announcing a dilutive issuance of new equity and a simultaneous issuance of bonds whose buyers will be shorting the stock. Oh, and on top of all that, Fannie Mae announced that it will cut its dividend by 10 cents from the 35 cents paid this quarter.

Still, bad news for shareholders is probably good news for any taxpayers alarmed by Charles Duhigg's 2000-word article today on the precarious position that Fannie and Freddie find themselves in. As long as the capital markets are willing to inject new capital into the GSEs, that means the federal government doesn't have to.