Banking & Capital Markets

Fannie-Freddie Bailout Losses Hit Banks

Financial institutions holding Fan and Fred preferred stock as part of their core capital will likely have to write off big losses.
Stephen TaubSeptember 11, 2008

While the federal government is bailing out Fannie Mae and Freddie Mac, a number of already embattled banks are starting to issue warnings about the hits they must take on their balance sheets as a result of the historic deal.

As a result of the deal with the government-sponsored enterprises, which suspended the dividends shareholders would earn, many classes of Fannie and Freddie’s preferred stock plunged around 80 percent in value on Monday, according to the Associated Press. Banks typically hold the preferred stock as part of their core capital and will likely have to write off those losses, the news services reported.

PNC Financial Services Group, for instance, warned in a regulatory filing it expects to record a “significant other-than-temporary impairment charge” in the third quarter on the shares of perpetual preferred stock in Fannie Mae, as well as the Federal Home Loan Mortgage Corporation, with an aggregate cost of $80 million.

LSB Corp., the parent company of River Bank, reported that it expects to record a non-cash charge in the September quarter for other-than-temporary impairment of two preferred securities issued by Fannie Mae and Freddie Mac.

On August 13, LSB reported that the preferred securities, which had a cost of $10.1 million at June 30, had declined in fair value to $6.4 million at August 11. As part of the company’s ongoing other-than-temporary- impairment-evaluation process, management would continue to monitor the fair value of its Fannie and FHLMC preferred stock.

Further, Cascade Financial Corp. warned that it expects to record a non-cash, after-tax charge to its income statement related to its investments in Fannie and Freddie preferred issues for the September quarter. The total potential remaining loss on the company’s investment in the preferred stock is $12.1 million on an after-tax basis.

Cascade reported that it owned preferred shares issued by Fannie Mae with a $10.2 million book value and Freddie Mac with an $8.4 million book value. On September 8, the combined fair value of those securities had declined to about $2.1 million, it added.

Regional banks Midwest Banc Holdings Inc. and Gateway Financial Holdings have very large exposures to Fannie and Freddie as a proportion of their capital, according to AP.