Would it be worth it to buy Fannie Mae or Freddie Mac stock while the price is low?

Question

Just wondering, because it seems like the gov may end up bailing them out. I know that the gov has bailed out some airlines in the past and now their stock is doing well. Just wanting to know if this might be a good long term investment.

Answer 1

Airline stocks are doing well?  That is news to me.  Today Barrons broke a story that a bailout might be close, and both stocks dropped about 20%.  Does that sound to you as if a government bail out is good news to investors.

Most investors believe that a bail out will wipe out all equity in the companies and perhaps much of the subordinate debt besides.  The companies had as a primary goal big salaries for their executives and to h**l with the stock holders.  I am sure that the executives will come out just fine bail out or no bail out.  The stock holders will be left with worthless paper.  Perhaps the CEO of one of these two companies will be the next secretary of the trueasury.  It would not surprise me in the least.  

Answer 2

A bailout may involve a chapter 7 or 11 re-organization.  If this should occur the common shareholder loses his/her entire investment.  Even if the company emerges from bankruptcy, new shares will be issued, old shares are obliterated.

I would suggest you do not buy Fannie or Freddie.

Answer 3

No.  A government bail out doesnt necessarily mean they are going to preserve the stock.  They are going to preserve the process of what these companies do.  They could recapitalize the companies and wipe out shareholders.