So the dark underbelly of the GSE bailout is beginning to take shape. Though the winners haven't fully emerged yet, we are seeing the losers in Freddie Mac, who slashed stock dividends from 25 cents a share to 5 on the report of ongoing and worse loses than expected.
If Freddie Mac were subjected to free market forces, at this point, this would be the death knell. Raising capital would be impossible, which would cause the company to fold. However, now with the Treasury Department willing and able to buy as many shares as it wants to, at taxpayer expense, Freddie Mac is no longer beholden to performance standards. It's throwing the value of the stock out the window. Shareholders in Freddie Mac are screwed.
As with the Fed's bailout of Bear Stearns, stockholders are cast aside. It is the bondholders being rescued here, at stockholder and taxpayer expense.
Despite the stated intention of the legislation to keep house prices unaffordable, my guess is the correction will continue unabated.
ADDENDUM (8/8/08): Over the past couple days Freddie Mac reported an $821 million quarterly loss, and Fannie a $2.3 billion loss for the quarter, both with dividend cuts. Whispers are starting to be heard of reduced mortgage purchases and insurance as the GSEs go defensive with their capital base.