Again, investing in bankrupt stocks is dumb. But what about investing in stocks for strange federal quasi-agency companies that may or may not be bailed out by the Federal Government when bad times occur? Freddie and Fannie helped originate, securitize, hold, or insure 60% of american home mortgages. During the crash, they went bankrupt, and the government claimed they would NOT bail them out. Their stocks crashed and they went into bankruptcy. While I was no expert on the companies, at an attractively low stock price of $0.37 per share, I figured it was worth a risk to throw some money at somebody wanting to bail out Freddie and Fannie - even if it were only to purchase their institutional knowledge, customers information, name, or other proprietary information. I also figured there's no way the government wouldn't backstop Freddie and Fannie to some extent.
I was right - the government eventually ate most of Freddie and Fannie's errors to the tune of $185 billion dollars of defaulted mortgages. Since then, Freddie and Fannie have been clawing for survival, barely ticking along, but recently they did manage to repay the bailout, with interest. The stocks are roughly trading at a 1000% return - Fannie traded at $3.71 per share today.
I don't know where it's going to go from here of course, because two Senators are championing an effort to dissolve Freddie and Fannie and create a new, smaller, more streamlined organization to fulfill their missions. Read about it here: http://articles.latimes.com/2014/mar/11/business/la-fi-fannie-freddie-20140312.
What is that going to mean for shareholders of Freddie and Fannie? Is the government going to buy them out? Liquidate? Are their assets going to be spun-off and sold to another organization? Are the shares going to be absorbed into a new company? While the proposed reorganization seems like it might be a much-needed refit for the mortgage securitization market, it leaves equity holders wondering about what the future holds.
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