Paulson’s First September Mistake, Killing The Preferred Stock Market

Newsclips — September 23, 2008

By Gregory Blaha

The Financial Times – Freddie and Fannie bank losses grow US regulators have underestimated potential bank losses on preferred stock issued by Fannie Mae and Freddie Mac, the American Bankers Association said on Monday. Nearly a third of US banks hold preferred stock issued by the two mortgage financiers that were taken into conservatorship this… Continue reading Paulson’s First September Mistake, Killing The Preferred Stock Market

  • The Financial Times – Freddie and Fannie bank losses grow
    US regulators have underestimated potential bank losses on preferred stock issued by Fannie Mae and Freddie Mac, the American Bankers Association said on Monday. Nearly a third of US banks hold preferred stock issued by the two mortgage financiers that were taken into conservatorship this month, according to an industry survey conducted by the ABA. The average bank exposure to such securities relative to core equity capital was 11 per cent.

Comment Back on September 7, the Treasury nationalized Fannie Mae and Freddie Mac. As part of that action the decision was made to “blow up” the preferred shareholders. At the time, Treasury Secretary Paulson said:

The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

To be blunt, Paulson was dead wrong. As the next chart shows, financial companies’ preferred stocks crashed in the immediate aftermath of this decision. We believe this so weakened the prospects for financial firms, along with the decision for the Korea Development Bank to walk away from Lehman Brothers, that they could not recover.


<Click on chart for larger image>