Fannie and Freddie rescue, a bailout for whom?

By Jennifer Ablan

NEW YORK (Reuters) - The rhetoric from the Washington backers of the Fannie Mae-Freddie Mac rescue effort has been consistent on one front: this is no shareholder bailout.

But that message seems to have been lost on the stock market, particularly holders of Fannie Mae and Freddie Mac shares. After being on an apparent trajectory toward zero just over a week ago, both stocks have more than doubled since the beginning of last week when the Bush administration unveiled its plan to shore up the two lynchpins of the U.S. housing market.

"The real winners are the investors who bought Fannie and Freddie shares last week," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

True, many long-time shareholders are still reeling, with both stocks still down by some 80 percent since the credit crisis erupted last summer. And no one argues that the primary goal of the plan's architects is to put a floor under a shaky mortgage market. Fannie and Freddie are two biggest U.S. providers of mortgage finance.

"This is a bailout for the mortgage market -- not for Fannie and Freddie shareholders," David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management, LLC, said in an interview on Wednesday. Dreman is one of the largest holders of Fannie Mae and Freddie Mac shares.

On Wednesday afternoon, the U.S. House of Representatives approved the measure, sending it on to the Senate. The White House earlier had dropped a previous threat to veto the legislation.

The plan allows Fannie and Freddie, which are chartered by Congress but are privately run companies, to have access to an expanded credit line from the Treasury Department and even access to money from the Federal Reserve if needed. Also, it would permit the Treasury to make unlimited equity purchases in Fannie and Freddie to prevent a collapse in the firms.

Even if the government does not find it necessary to buy shares of the two companies, both will likely have to raise billions in new capital, which would likely dilute the holdings of existing shareholders.