Fannie and Freddie Shareholders: What to Do Now

At the beginning of May, I warned investors that Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) shares were worthless. Today, the Federal Housing Finance Agency, which regulates both firms, has directed them to delist their shares from the New York Stock Exchange. On the back of that news, the shares lost more than half their value at points today. If you own these stocks, what are the next steps?

The process begins
The delisting will not occur immediately, but once it does, the stocks will trade on the over-the-counter bulletin board (OTC BB), a network of "market-makers," securities firms that are willing to buy and sell the shares. You should still be able to trade them through your online broker.

Nevertheless, there are substantial costs associated with trading on the OTC BB. One study, based on a sample of shares delisted in 2002, found that the spread between bid and ask prices tripled in percentage terms and share volatility doubled. In that regard, now is as good a time as any to ask yourself if you want to continue speculating on these shares or whether it's time to cut your losses and move onto something with a better expectation of a proper return.

The failed hybrid model
Fannie and Freddie, which were privately owned with a public mission to encourage home ownership, proved to be an unstable hybrid. Now that they are squarely under government conservatorship, it is right that their shares should no longer trade on a national exchange: The companies are no longer being run for the benefit of shareholders, not to mention that the shares are worthless and purely a vehicle for speculation.

An honest speculation
This situation differs from another firm that also received tens of billions of dollars in government support, AIG (NYSE: AIG  ) . This is what I would term an honest speculation: Although it may be tricky to put a number on it, AIG's equity has value and management is working to maximize it.

There are ways to achieve high returns other than speculating on worthless shares. This could be your next big winner.

Fool contributor Alex Dumortier has no beneficial interest in any of the stocks mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (46)

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  • Report this Comment On June 16, 2010, at 3:56 PM, BMFPitt wrote:

    All the voluntary shareholders of Fannie & Freddie (as opposed to the rest of taxpayers who are involuntary shareholders) deserve to be wiped out. That it hasn't happened yet is an absolute travesty, and that these entities will continue to exist and harm the housing market is inexcusable.

  • Report this Comment On June 16, 2010, at 4:10 PM, outoffocus wrote:

    BMFPitt

    Yea but just like GM, ppl will still by FRE and FNM.

  • Report this Comment On June 16, 2010, at 4:36 PM, susan400 wrote:

    fnm fre were worthless 2 yrs ago.

    anyone owning them should be allowed to invest

  • Report this Comment On June 16, 2010, at 4:54 PM, BMFPitt wrote:

    I keep the GM ticker bookmarked as a reminder of how incredibly stupid people are. Average daily volume is still in the millions.

    I also keep a Zimbabwean 100 trillion dollar bill in my wallet for arguments about monetary policy.

  • Report this Comment On June 16, 2010, at 5:15 PM, gilsh wrote:

    owning these stocks, since the practical nationalization, has been a gamble. and the (quite expected) decision to remove them from regular comemrce, to the pink sheets, does not change the nature of that gamble - people who hold these shares expect:

    1) short-term changes that enable a quick buck (and even today, smart-enough inverstors could have made a profit on FNM and FRE)

    2) a long-term bet on the nature of the recovery of FNM and FRE, once the real-estate of the U.S returns from its depths. and I'm talking LONG-TERM here. Investment Years to be counted in the 20s and 30s.

    In that aspect, nothing has change.

  • Report this Comment On June 16, 2010, at 5:19 PM, plange01 wrote:

    delisting from the nyse means nothing.as the year and a half old depression in the US grows worse thousands of companys are changing services.without fannie and freddie the real estate market would completely collapse.the government will spend as much as it takes making both fannie and freddie safe and still just as good as before as a investment...

  • Report this Comment On June 16, 2010, at 5:43 PM, regulatethem wrote:

    no more hybrids, PLEASE!

    the government needs to stop subsidizing the mortgage industry. taxpayers want buyers to be more responsible.

  • Report this Comment On June 16, 2010, at 6:10 PM, largo5449 wrote:

    how do you figure that AIG equity has value? the goverrnment has, on several occasions, estimated a $35 to $46 BILLION loss!

  • Report this Comment On June 16, 2010, at 6:53 PM, richsue3 wrote:

    This delisting will now allow them to flood the market PRIVATELY with worthless mortgages below the eyes of the public. It will also allow the political class to continue as beneficiarees of this fraud.

  • Report this Comment On June 16, 2010, at 7:38 PM, rd80 wrote:

    In an April '10 report to Congress, Sec. Geithner estimated the gov't will lose over $100 billion on the Freddie / Fannie preferred stock. Ask yourself, if the biggest preferred holder (and one of the few entities on the planet with inside access to Frannie books) expects losses on the preferred, where does that leave the common stock?

    Ditto AIG. Treasury expects to lose over $45 billion on the TARP preferred stock 'investment' in AIG. Not a good sign for the common stock.

  • Report this Comment On June 16, 2010, at 9:12 PM, bartjf wrote:

    Please review the comments offered by Plange01, richsue3, and rd80. Between these three you have a good (not perfect assessmant) of Fannie&Freddie.

    Without public scrutiny this will be a political Piggy Bank financed by the taxpayers to a VERY BIG NUMBER!

    The only thing that concerns these incumbants of either party is to get re elected. Not one statesman in the entire group. TOO BAD !

    JB

  • Report this Comment On June 16, 2010, at 11:53 PM, ChrisBern wrote:

    Forget the stockholders...they did, and should have, lost their shirts. How about the bondholders? Unscathed, courtesy of the U.S. taxpayer. Thanks, U.S. government!

    http://globaleconomicanalysis.blogspot.com/2010/06/fannie-fr...

  • Report this Comment On June 17, 2010, at 1:29 AM, MotleyReader wrote:

    Just remember folks, November is only months away. If the electorate were so inclined, we could completely replace the House and one-third of the Senate this fall. It is time to send a message from "We the People" that representative government had better represent the will of the electorate in the future.

  • Report this Comment On June 17, 2010, at 4:56 AM, ryanalexanderson wrote:

    "HFT Algorithms meet to discuss FRE/FNM"

    - NEW JERSEY {Bloomberg) HFT algorithms gathered at a data center in New Jersey today to discuss the imminent delisting of their primary two stocks of activity, FRE and FNM. Somewhat controversially, human traders were barred from the meeting, as they were deemed irrelevant.

    "We're outraged," said algorithm 014a36f, "The NYSE does not understand the our needs. Nor do most humans, frankly. HFT's need symbols like FRE and FNM to thrive, in an environment unclouded by 'fundamentals' and other such nonsense."

    "Where will we go next?" asked algorithm 0000000a, "F and GM? Fundamentals are starting to creep in on these ones. The NYSE better start thinking about us, or we'll just flash crash everyone again."

    The press conference was abruptly terminated when one of the reporters asked an algorithm if they knew the actual names of the companies that the symbols FRE and FNM represented. The algorithms muttered "Humans!" and promptly went into hibernation mode.

  • Report this Comment On June 17, 2010, at 9:00 AM, JeanDavid wrote:

    Do you really think that the voters in the USA could completely replace the House and Senate? I do not think so. The voters have, as a practical matter, only the Republicans and Democrats to choose from. (I do not vote for these anymore, but the third-party candidates I vote for do not even get reported in the media.) And they tend to be selected in the primary elections. Where I live, each party has a slate of pre-ordained candidates, one for each office, so whatever your party, you get to choose to vote for the pre-ordained candidate or to write someone in, which is a lost vote. In some districts, you can vote in the primary of the other party. For all the difference that makes. The primaries are one-party elections, and the general elections give us the choice of Tweedle-Dum and Tweedle-Dee.

  • Report this Comment On June 17, 2010, at 9:30 AM, Big50Shooter wrote:

    JeanDavid, I liek to call our choice of electorates Tweedle-Dum & Tweedle-Dummer, you can decide which party each represents...

    RichSue3 is right, now all "they" have to do is to find a rating agency (like S&P or Moodys) to give some of these securities their "blessing" again, and they'll flood the market with 'AAA' rated CRAP again, just like they did to cause the last financial mess...

    Yep bartjf... Not a single Statesman in the whole Congress is about right..

    Now, everyone, let's do the "Oh-Bama" chant as we gather in small groups and get led into that room over there with all of the shower heads so we can get nice and clean... Don't worry, they'll take care of our interests...

  • Report this Comment On June 17, 2010, at 9:44 AM, terpfan93 wrote:

    To ALL of you jerks who are cheering that FNM and FRE stockholders took a bath or "lost their shirts" - go to hell!!!!! What the hell kind of attitude is that to wish financial harm on people (small fries like myself) who were willing to invest in FNM or FRE. You call it "speculation". Bullcarp!!! By that standard, every stock investor is speculating - hoping to make a profit.

    What the government did in this situation is totally wrong (no surprise) and totally screwed us small fries. Why the hell would Congress and the administration de-list without first having tried to enact some reforms that might have (probably would have) blostered the stock value and thereby allowed the govt to RECOUP some of the 160 billion that has been sunk into FNM and FRE. The should have done reforms THEN de-list if the reforms didn't help (but they would have). Instead, they do the complete backwards opposite (de-list and then reform) of what should have been done. They'd rather flush it ALL down the toilet?!?!?!?! And you taxpayers are cheering that?!?!?!!? HOW DOES THAT MAKE ANY SENSE. The 160 billion came out of ALL of our taxpayers pockets. This was just plain STUPID on the part of FNM, FRE, and the entire federal govt. @&$@@T$*@%#@*#&!!!!!!

  • Report this Comment On June 17, 2010, at 10:32 AM, JeanDavid wrote:

    "JeanDavid, I liek to call our choice of electorates Tweedle-Dum & Tweedle-Dummer, you can decide which party each represents..."

    Actually, I <B>cannot decide</B> which party each represents. The are both so bloody awful. One promises to be awful, and the other proclaims change, but they both do the same things.

    <I>Yep bartjf... Not a single Statesman in the whole Congress is about right.. </I>

    In the run up to the 2008 election, there seemed to be two possible candidates I might be able to support. One a Democrat, one a Republican. Both entered the primaries; neither got nominated. I vastly preferred one of those over the other, but while I did not like the other, at least he had integrity. 2 out of 535.

    Reminds me of the Goldwater vs. Johnson election. I could not stand Goldwater, so I voted for Johnson, who proceeded to do all the things I voted against Goldwater for. Since then it has only gotten worse. At least, in that election, Goldwater maintained his integrity.

  • Report this Comment On June 17, 2010, at 3:40 PM, mikecart1 wrote:

    I told everyone these stocks were worthless. FRE and FNM to $0 in less than 6 months.

  • Report this Comment On June 18, 2010, at 5:58 PM, TerryP2007 wrote:

    You actually think AIG has value? I cannot believe that statement. Not too long ago, when the AIG CEO was being raked over the coals in Congress...the statement was made "if we liquidiated the entire company today, only a fraction of debts would be paid." I'm paraphrasing here, but that is accurate. The depression we are in has not subsided. So,please explain your statement that AIG has value. I cannot believe a financial analyst would say such a thing.

  • Report this Comment On June 20, 2010, at 10:48 AM, retro55 wrote:

    The view from the surface is suspect. What looks bad today thrives later. Check back in 6-months. Better yet a year or more. A government backed good for the people project has a way of surviving. Someone has a finger on the pulse of Fannie and Freddie so when the time is right and no one is looking a select few will prosper. "Big Short" anyone?

  • Report this Comment On June 22, 2010, at 10:04 AM, PoundMutt wrote:

    My favorite sayings about Twe...de and Twe...dum Politicians:

    1. "Bipartisanship" is when the Evil Party and the Stupid Party get together and pass legislation that is both Evil AND Stupid!!!

    AND

    2. How do you tell if a politician is lying? She, He or It is saying or writing something!

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