Fannie Mae Preferred Stock and Freddie Mac Preferred Stock: As Shares Plummet, Retirees Feel the Pinch

by Jacob Zamansky on September 16th, 2008 at 2:53 pm : Comments 000

If you asked any Wall Street broker or securities analyst what constitutes a “conservative” investment back in 2005, Freddie Mac preferred stock and Fannie Mae preferred stock – and the preferred stock of other financial services companies for that matter – would have been atop the list.  Fast forward to the beginning of 2007 and any broker worth his or her Series 7 certification should have told clients to bail out and seek shelter in real cash equivalents as the credit crisis showed no signs of relenting.

Unfortunately, we are hearing from many investors that they were not told of the mounting risks of holding onto Fannie Mae preferred stock and Freddie Mac preferred stock.  After all, Fannie Mae preferred stock and Freddie Mac preferred stock, along with preferred stocks from many financial institutions, were pitched as income-generating “conservative” havens.  In fact, many brokers falsely touted Freddie Mac and Fannie Mae preferred stock as being “backed” by the U.S. government.  But even as the alarm bells rang clear, and investors questioned whether holding Fannie Mae preferred stock and Freddie Mac preferred stock was in their best interests, we are hearing that brokers advised them to double down on Fannie Mae preferred stock and Freddie Mac preferred stock as late as January of this year.

While Fannie Mae preferred stock and Freddie Mac preferred stock was traditional pitched “as safe as bonds”, they never were bonds.  They are an entirely different classification all together.  It’s true.  There was once a time that preferred stock from a financial services firm would constitute a conservative investment.  However, by about May 2007, with the credit crisis in full swing, brokers had a responsibility to shift strategy which is a normal reaction to changing market conditions. Regrettably for investors, many brokers did not alter their client’s portfolios and continued to sell Fannie Mae preferred stock and Freddie Mac preferred stock as late as the last three months when it was clearly apparent that there were huge risks. It is equally troubling that a large number of the victims are elderly retirees or those nearing retirement. Brokers that I have spoken to say it would be unreasonable to sell a person in or nearing retirement more than 20% of their investments in preferred stock. There are some who had 100% of their investments in Fannie Mae preferred stock, Freddie Mac preferred stock and preferred stock of other financial institutions.

To many that are not versed in the ways of Wall Street, this sounds unbelievably perverse.  While I can’t argue with that sentiment, there is an explanation. Seeking to raise $6 billion, Freddie Mac began issuing preferred stock in November, pricing it at $25 a share with a fixed dividend rate of 8.375% through December 31, 2012.  Fannie Mae followed a month later with an offering priced at $25 a share with a fixed rate of 8.35% to 2010.  It’s no coincidence that the lead underwriters for the Fannie Mae preferred stock transaction were Merrill Lynch and Lehman Brothers, which as of today no longer exist for all intents and purposes.

Faced with holding so much inventory, the underwriters unleashed their sales force and unloaded the toxic Fannie Mae preferred stock and Freddie Mac preferred stock by any means necessary. You can envision the pitch including a comment that implies the U.S. government would never let shareholders take a bath on Freddie Mac preferred stock and Fannie Mae preferred stock.

Needless to say, the government’s takeover of the two firms has decimated the value of Freddie Mac preferred stock and Fannie Mae preferred stock.  Not only are the dividends suspended, but the value of the preferred shares in both companies is less than $3 per share.

At the very least, brokers and financial advisers should have warned their clients against holding Freddie Mac preferred stock and Fannie Mae preferred stock and reallocated their portfolios.  If the evidence shows that brokers didn’t warn their clients of the risk or that concentrated holdings of Freddie and Fannie preferred did not fit with a client’s risk profile, they will be held accountable in a FINRA arbitration hearing.  Indeed we will be filing claims shortly.

The Fannie Mae preferred stock and Freddie Mac preferred stock debacle isn’t the only example of unbridled greed that has typified Wall Street.  Preferred shares of financial institutions were aggressively sold to conservative investors, perhaps because the commissions for brokers of these securities were greater than fixed-income bonds.

These are dark days for Wall Street, no question.   But over the past twenty years, its clear that brokers, CEOs and risk managers alike have learned nothing from the mistakes of their predecessors.  So I’m saving my empathy for the investors who are the true victims.

Filed under Financial Stocks, Securities Arbitration
and arbitration, Fannie Mae preferred stock, Freddie Mac preferred stock