Few Gain, Many Lose from Frannie Bailout

UK bank shares are having a huge day (above are the 9:20 a.m. (Eastern Time) prices of UK bank stocks, September 8, 2008), following this weekends Frannie bailout announcement.

It appears that the short squeeze in bank stocks is in this morning's trading.

Here are some excerpts from the saavy folks at DealBook.

Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers.

Golden Parachutes all around:

Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay...

Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million

Its not clear that these former Frannie executives will actually get compensated.

But worst of all, long investors in either are getting killed:

The shareholders of Fannie Mae and Freddie Mac, including many employees, will not be so lucky. The companies’ share prices have plunged about 90 percent this year, wiping out about $70 billion of shareholder value. The shares are likely to be worth little or nothing under the government’s rescue plan.

As a result, Wall Street money managers and everyday investors alike stand to lose big. Bill Miller, the star mutual fund manager at Legg Mason, increased his bet on Freddie Mac even as the company’s shares plummeted this year. Last week, when Freddie Mac stock was trading at about $5, Legg Mason disclosed that it had bought an additional 30 million shares. Other value-oriented investors, including Rich Pzena, David Dreman and Martin Whitman, also placed big bets that the mortgage companies would recover. None of these money managers returned calls for comment.

‚ÄúI am just shocked how they missed this, and why, when it became completely clear that the problem was snowballing, guys like Bill Miller doubled down,‚ÄĚ Douglas A. Kass, head of Seabreeze Partners and an outspoken short-seller, told The Times.

And the few investors that gain:

Among the most vocal short-sellers betting against the companies is William A. Ackman, who runs a hedge fund called Pershing Square Capital. Mr. Ackman was among the earliest to warn of the credit crisis, and he is believed to have landed a windfall after shorting both companies, according to The Times, which cited a person with direct knowledge of a recent investment letter.

In the end, American taxpayers have been handed the bill, helping the rest of us around the world sleep a little better at night, now that a great deal of credit risk has been been mitigated.

Thank you Secretary Paulson.

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