Trouble for regional banks: analyst Sovereign, Westamerica and Gateway, large investors in Fannie Mae and Freddie Mac, could be hurt if government rescues mortgage giants

by Jack Kelly on September 2, 2008

NEW YORK (AP) — Some regional banks with substantial holdings in Fannie Mae and Freddie Mac preferred stock could suffer from the uncertainty over the mortgage finance giants’ fate and the possibility that the government will rescue them, an analyst said Monday.

A government rescue of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) — whose share prices have plunged in recent weeks as they struggle with billions of dollars in losses from bad mortgages — could be costly for scores of investment, banking and insurance companies that hold billions in their preferred shares.

Preferred stock holdings

Regional banks with the largest exposure to Fannie and Freddie preferred stock as a proportion of their capital include Sovereign Bancorp Inc., (SOV, Fortune 500) Westamerica Bancorp (WABC) and Gateway Financial Holdings Inc (GBTS)., Samuel Caldwell, analyst at Keefe, Bruyette & Woods wrote in a research note.

Preferred shares usually pay a fixed dividend and have priority over common stock when it comes to dividends and bankruptcy liquidation.

While slightly riskier than bonds, which have the highest priority in times of trouble, companies often invest in preferred shares for certain tax advantages.

Still, on Wall Street, Fannie and Freddie’s existing preferred shares are trading like junk bonds, yielding around 17% to 19% instead of around their 6% dividend levels. The higher yield is an inducement to investors to accept the higher level of risk that the dividends won’t be paid.

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