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The Treasury Department will need to provide Fannie Mae and Freddie Mac as much as $40 billion to recapitalize the troubled mortgage giants, PIMCO bond magnate Bill Gross said.
Gross said on CNBC that the public backstopping of the government-sponsored enterprises will be the only way the Treasury can restore investors' confidence that the two secondary market companies will not fail.
"They need to hear not only that they're willing to stand behind Fannie and Freddie but that their money is going to do that," he said. "In terms of the amount, 15 to 20 billion per institution in the form of preference or preferred stock that hopefully will be at the same level of the existing preferred stock."
The preferred stock will give taxpayers priority in getting the money bank as Fannie [FNM
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] and Freddie [FRE
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] continue along in their business of buying mortgages from banks that don't wish to have the liabilities on their balance sheets.
Consequently, investors holding common shares will be virtually wiped out, as the market is indicating in its current bargain-basement trading of the stocks.
"At three and four dollars per share respectively, in effect the market is valuing both of these companies at zero," Gross said. "These are perpetual options at these prices with three to four dollar prices that effectively use a strike price of zero for the common stock."
Gross said it's possible the Treasury bailout could put some value on the common stock but "in our opinion, not much."
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