Rumors are floating that a government plan to assist Fannie and Freddie would involve acquiring preferred shares in them, thus infusing them with cash. Preferred shares pay a fixed dividend and have more priority then normal stock. They are more risky then stocks, but many prefer to invest in them for tax advantages. However, many investors are afraid that if the government does this it will wipe out common stockholders already with the companies. Shares in Fannie and Freddie have already lost almost 90% of their initial value this year alone. No one is sure what could happen to the preferred stock holders. An investment advisor with SitkaPacific Capital Management, Michael Shedlock, says, “That depends on how big Fannie and Freddie blow up,”.

Right now Fannie has 17 classes of preferred stick, with almost 600 million outstanding shares. Freddie has 24 classes with 460 million outstanding shares. Many investors are afraid that there would be a large fall out. They say that the already existing preferred shares are trading like junk bonds. They are bringing in 17-19% instead of the the 6% dividend level. This is a huge problem for investments as a high yield means investors have to accept a larger risk that companies will not be able to pay the dividends.

Of course there are also those that support the rescue plan. James Cox, a Duke law professor, says that “Even if (any) rescue effort gives a priority to the federal government...that still makes Fannie and Freddie more solvent,”, which would help preferred stockholders see the value of their investments rise.

It has been estimated that it could cost the government almost $25 billion to try and rescue Fannie and Freddie.