Preferreds reverse direction, trend higher; Fannie, Freddie volatile as Fairholme reveals plan

By Stephanie N. Rotondo

Phoenix, Nov. 14 - After spending the first part of the week on the decline, preferred stocks were attempting to tick up on Thursday.

At midday, the Wells Fargo Hybrid and Preferred Securities index was up 4 basis points. By the close, it was up 18 bps.

However, a trader said that overall trading was muted aside from a few issues. In particular, he said that Freddie Mac and Fannie Mae preferreds continued to be active following a news report out Wednesday that indicated a group of private investors were looking to take the agencies private.

The trader noted that the group is aiming to take only a portion of the companies, leaving most of the potential risks with the federal government.

Another market source said there was "no discernable trend" in the preferreds after Bruce Berkowitz's hedge fund Fairholme Capital Management LLC revealed its proposal to take over the agencies' mortgage-backed securities insurance businesses.

The source said that the plan was "kind of a good deal," but only for preferred holders. "Which makes it very unlikely to happen."

Under the proposal, Fairholme and its group of cohorts want 100 cents on the dollar for their preferred holdings, which currently trade at less than 50 cents on the dollar. Preferred holders and other investors would then backstop a $17.3 billion rights offering.

But the source noted that in order to take over the insurance potions of Fannie and Freddie, "the business would have to have a clean slate," which would leave the government holding about $20 billion of losses tied to those units.

"The Treasury has to keep all the initial risk," he said - something he highly doubted it would be willing to do.

Freddie's 8.375% fixed-to-floating-rate noncumulative perpetual preferreds (OTCBB: FMCKJ) were up 64 cents in early trading at $9.45, but they finished the day up only 9 cents, or 1.02%, at $8.90. Fannie's 8.25% series S fixed-to-floating-rate noncumulative preferreds (OTCBB: FNMAS) were 41 cents better at $9.26 early on, but they closed the day down 17 cents, or 1.92%, at $8.68.

Fannie's 8.25% series T noncumulative preferreds (OTCBB: FNMAT) were meantime up 54 cents, or 5.83%, at $9.80.

ING heads up active list

In paying securities, there were only three issues that saw trading of over 1 million shares during Thursday's session.

"Liquidity was towards the light side," a source said.

One active issue was ING Groep NV's 8.5% perpetual hybrid capital securities (NYSE: IGK), of which over 3.22 million shares changed hands. The issue ended the day up 2 cents at $25.52.

The paper has been called for Dec. 15 redemption.

Also busy were Citigroup Inc.'s 6.875% series K fixed-to-floating-rate noncumulative preferreds (NYSE: CPK). That issue closed up 9 cents at $24.97, with over 1.7 million shares being exchanged.

And Goldman Sachs Group, Inc.'s 6.125% notes due 2060 (NYSE: GSF) had about 1.11 million notes trade, with the issue rising 12 cents to $24.82.

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