Freddie Mac's (FRE) New Stock Sales, A Knife In Shareholder Hearts

It now appears that Freddie Mac (FRE) will raise about $10 billion. The only trouble with that is that its current market cap is only $6 billion. For shareholders, the news is almost as bad as a government takeover.

According to The Wall Street Journal, Freddie Mac "is considering raising capital by selling as much as $10 billion in new shares to investors." That means the firm may dodge having to get money by selling shares to the US Treasury or taking down massive borrowings from the Fed.

Fueling the company’s desire to sell the stock now is the 50% plus improvement in its share value over the last two days. The big talk from the federal government about how it will not allow Freddie or Fannie Mae (FNM) to go down the sewer has brought some shareholders back in. They are about to be faced with some more bad news.

Even if Freddie Mac can sell its new stock at a modest premium, and that is a stretch, a share of the company should be worth less than half of what it is on the day the money is raised. Based on the current share price, that would push the stock down below $4.

The government has made it clear that, while it may bail out Freddie and Fannie and their managements, it will not bail out shareholders. It is plain that the companies will not so the shareholders any good either.

Douglas A. McIntyre