Fannie Warns of Reverse Stock Split

Fannie Mae (FNM: 1.02 -0.97%) appears to be headed for a reverse stock split in a bid to keep its shares trading on the New York Stock Exchange. According to a filing with the Securities and Exchange Commission last week, the GSE said it had notified the NYSE that it intends to bring the share price of its common stock and the average share price of its common stock for 30 consecutive trading days above $1.00 by no later than May 11, 2009.

Given that taxpayers own roughly 80 percent of the company, as a result of a federal takeover earlier this year, there doesn’t appear to be any other option — even if Fannie said it is working with the Federal Housing Finance Agency “to determine the specific action or actions that Fannie Mae will take to cure the deficiency.”

Fannie said that it would likely undertake the reverse split, subject to approval from the U.S. Department of Treasury. “Fannie Mae expects to determine the actual number of shares that will produce one share of common stock as a result of any reverse stock split based on both the market price of Fannie Mae’s common stock prior to announcement of the split and additional input from FHFA and Treasury,” the company said in its statement.

It’s a bit disconcerting to existing shareholders, certainly, but it’s also surreal to think that Fannie Mae is resorting to what has long been the province of penny-stock tricks to keep its shares publicly-traded. Even more surreal, too, given that the the Congressional Budget Office has already suggested that the Treasury needs to take the full operations of each GSE directly onto its balance sheet.

“It is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget,” said Peter Orszag, CBO director, in September. “The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.”

Reverse splits are usually an admission of failure by management, and a technical trick to boost share price that does little to resolve underlying fundamentals. Reverse splits were a common trick during the dot-com bubble burst in early 2000, and often presaged bankruptcy by the firms involved.

Write to Paul Jackson at paul.jackson@housingwire.com.