Lots of short/intermediate term risk with FRE/FNM but they're about the best opportunity for a HUGE upside in financials.
Once the mortgage market stabilizes & housing prices pick up, FRE/FNM have HUGE upside. Government DOES not want FRE/FNM on the balance sheet, so the max they're going to hold is 79.9% of common, which is what they're at now, so common equity never gets wiped out.
Treasury is backstopping losses for 3 years.. might be in a rocky trading range in the under $1 to $2 range for a while, but the government stands nothing to gain from wiping out common equity & carrying FRE/FNM on the balance sheet.
The Fed isn't buying MBS so FRE/FNM are the last big guns in their MBS arsenal. Look for big news in February regarding FRE/FNM's future role in new programs + big upside in the stock price at least short-term.
As soon as we see a couple quarters of real improvement in unemployment, housing prices, and foreclosures, FRE/FNM are on a steady path up, in my opinion.
Pre real-estate bubble, 97-99 FRE traded in the $35-40 range.. even at 80% dilution that puts the stock at $8 a share.. FRE/FNM hold half or guarantee half of all mortgages in the US. No way in hell is the government going to liquidate FRE/FNM.. no bankruptcy.. counter-party fall out would be too huge.
FRE/FNM are not only too big to fail, but they're the last really BIG tool the government has in the housing/mortgage market right now.
Bet against the feds if you want - don't hold your breath for 25 cents though!