Fannie/Freddie Prefs vs. Common?

Following up my writeup on the GSE preferreds, I’ve attached 2 research reports, one that favors the common stocks (FNMA/FMCC) and one that favors the preferred stocks (my view).

The first report argues that the upside of the common stocks far exceeds the potential upside of the prefs and was put out by Whitney Tilson’s Empire Investment Report (, a paid subscription service that I have no affiliation with aside from the fact that I am friends with Whitney and that it was at his Value Investing Congress that I initially presented on this topic in 2011.  He has given me special permission to share this with you, because he also interviewed me in this issue. 

The second report was put out by Dick Bove at Odeon and suggests that the preferreds are the better way to play.  I share this view.

Whereas there certainly exist scenarios where the common upside outstrips the upside on the preferred, I believe there is an equally likely chance of a recapitalization scenario that effectively converts the pref into common, resulting in massive dilution at the common level and uncapping the upside to the preferred far beyond par.  I do not really see a scenario where prefs somehow get screwed in favor of the common.  Currently, the combined market caps of the two common stocks (FNMA and FMCC) total almost $34 bn, whereas the combined market caps of all 40 preferred stocks total only $16.3 bn on almost $34 bn par amount.  This makes no sense to me – imho, I think either the common should be much lower, or the prefs should be much higher.  We shall see.



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