Fannie and Freddie Bailout in the Works. Shareholders to Get Screwed.

From The Times of London:

US TREASURY secretary Hank Paulson is working on plans to inject up to $15 billion (£7.5 billion) of capital into Fannie Mae and Freddie Mac to stem the crisis at America’s biggest mortgage firms.

The two companies lost almost half their market value last week as rumours of a government bail-out swept the stock markets, hammering share prices around the world.

Together, the two stockholder-owned, government-sponsored companies own or guarantee almost half of America’s $12 trillion home-loan market and are vital to the functioning of the housing market.

The capital-injection plan is said to be high on a list of options being considered by regulators as a means of restoring confidence in the lenders. The move would protect the American housing market, but punish shareholders in both companies.

Under the terms of the proposed move, the US government would receive a new class of shares in exchange for the capital, which would be hugely dilutive to shareholders. ...

Paulson killed off speculation that the government would renationalise the two agencies, a move that would have pitched the US public accounts into a new state of crisis.

However, Paulson pledged to support the two companies “in their current form”. He is said to have been concerned about the prospect of a rescue plan benefiting shareholders. ...

Some in Wall Street believe a rescue plan may be announced ahead of tomorrow’s US market opening to calm nerves and support the debt auction.

According to Yahoo! Finance, Fannie Mae and Freddie Mac combined are currently worth $15 billion. So, if the U.S. government injects another $15 billion, current shareholders will instantly lose huge stakes in the companies. However, that's the risk you take for owning stocks.

Also in the article:

Citigroup is expected to reveal further writedowns of at least $8 billion with its second-quarter results, and Merrill Lynch is forecast to reveal writedowns of some $4 billion.

Both banks are expected to post sizeable losses for the second quarter, and reveal plans to sell off billions of pounds worth of assets.

In other news this weekend, IndyMac Bank, a former unit of Countrywide Financial—and unrelated to Freddie Mac and Bernie Mac—was seized by the FDIC on Friday.

May you live in interesting times. Comments from readers?