Warren Buffet, the oracle from Omaha, said today in a CNBC interview the “game is over” for Fannie Mae and Freddie Mac. He stated the not-so-obvious fact that the two GSEs both have a zero net worth which means stock and bond holders are holding an empty bag.
Hank Paulson’s recent law gives him the ability to lend or invest capital without restraints, so those with a stake in the two companies are holding their collective breaths.
The biggest losers should Paulson decide not to act are the regional banks like Midwest Banc Holdings with $67 Million in preferred stock at stake who’s CIO had this to say,
“I guess we are betting on Paulson. We have to believe that his plan carries the day somehow.”
Many regional banks, including the ones holding your checking and savings accounts, have millions invested with the two GSEs. Banks can not afford another hit to their balance sheets that a Fannie / Freddie collapse would surely cause. Banks are already capital strapped and another writedown of this size could trigger runs on regional banks like we saw last month ala IndyMac Bank and others.
Last week I wrote about Greenspan’s take on the crisis and his solution was to nationalize the GSEs wiping out shareholder equity with one mighty swipe of the pen.
Buffet seems to say here…it’s going to happen one way or the other.
My take is similar but slightly different. Sure, common share holders like individual stock owners (you and me) will get wiped out soon, but Paulson will probably pay the foreign bond holders and preferred stock holders since most of them are institutional investors both foreign and domestic.
This divvying up of the liabilities and keeping those happy who you need to invest in our debt and equities in the future is Paulson’s paramount objective…and it’s why he got legislative authority with the new law in the first place…to use it.
You didn’t really believe him when he said he most likely wouldn’t use it…did you?
Silly rabbit…tricks are for kids!