BizJournals Portfolio
Home >   Business Views, Opinions and Blogs >   Business Blogs >   Market Movers >  

Why Do Regional Banks Hold Fannie And Freddie Preferreds

Market Movers

by Felix Salmon
Main
How Big are Subprime Losses?   What's an Easy Way to Buy Cheap Assets?

Recent Blog Posts

Links

Aug 26 2008 9:27am EDT

Why do Regional Banks Hold Fannie and Freddie Preferreds?

I just saw this, from the FT:

Regional banks, together with US insurers, hold the majority of Fannie and Freddie's $36bn of outstanding preferred stock, which could be wiped out in the event of a government rescue.

This is creating some bickering between Treasury and the Fed, according to John Carney, with the Fed worried that an aggressive recapitalization of Fannie and Freddie could have nasty systemic consequences if the brunt of the hit was borne by regional banks.

But here's my question: what on earth were these regional banks doing holding the GSEs' preferred stock in the first place? Senior debt I could understand, but this is equity, at least from a regulatory perspective. And when they bought it, I doubt it was yielding much more than their own cost of funds. It all makes very little sense to me -- which of course is par for the course, in this credit crunch.

If we've learned one thing over and over again this past year, it's that the financial system often behaves in bizarre and seemingly illogical ways. At some point, a "reversion-to-making-sense" trade will start becoming profitable. But if you're marking to market, be warned: there might well be a lot of downside yet to come.

blog comments powered by Disqus
Real Business, Real Results
Out of the 'Family'

Did anyone at Microsoft ever watch the (gasp!) offensively funny show Family Guy?

Cruz Missile Lands

Ex-Morgan Stanley exec Zoe Cruz is now heading her own hedge fund. Are Wall Street's leaders done?

Scandal Chic

Martha, Bernie and Skilling know that what you wear for court can go a long way in public perception.

spotlight on

Health Care

Bad to the Bone No More

Companies such as General Mills say they're stepping up efforts to change employees' bad behavior and promote healthier lifestyles. Read More