JP MORGAN, FANNIE AND FREDDIE

JPMorgan Says Fannie, Freddie Investment Declined (Update2)

By Edgar Ortega

Aug. 25 (Bloomberg) -- JPMorgan Chase & Co., the second- biggest U.S. bank, said the value of a $1.2 billion investment in Freddie Mac and Fannie Mae shares has declined by half so far this quarter.

The losses from the investment in perpetual preferred shares of the two U.S. mortgage lenders may cut into quarterly earnings, the New York-based company said today in a regulatory filing. Freddie and Fannie preferred stock is trading as low as 19 cents on the dollar on speculation the companies may suspend dividends to weather the biggest housing slump since the Great Depression.

``The precise amount of losses that may be incurred on these securities for the third quarter is difficult to determine, given the significant volatility being experienced in the market values of these securities,'' JPMorgan said in the filing with the U.S. Securities and Exchange Commission.

JPMorgan declined $1.54, or 4.1 percent, to $36.13 in New York Stock Exchange composite trading. The stock has declined 17 percent this year, compared with a 30 percent drop in the KBW Bank Index.

Banks including Sovereign Bancorp Inc. and M&T Bank Corp. may also have to write down the value of preferred-share holdings, KBW Inc. analyst Samuel Caldwell wrote in a report to clients today. Banks typically hold Freddie and Fannie preferred stock because it can be used as capital that regulators require to cushion against losses on loans.

Charges Expected

Sovereign, the second-largest U.S. savings and loan, may take ``significant'' charges on its preferred stock holdings in Fannie and Freddie, Chief Financial Officer Kirk Walters said in July. The stakes were valued at $623 million at the end of June.

M&T Bank, based in Buffalo, New York, held $162 million in preferred shares as of June 30. The lender's exposure to it ``is somewhat limited,'' CFO Rene Jones told analysts last month.

E*Trade Financial Corp. said last month it will record a pretax loss of $83 million this quarter after selling some preferred shares. The New York-based company's Fannie and Freddie investment was valued at $330 million as of June 30.

Preferred shares rank one level above common stock in the capital structure, which is used to determine the priority of payment in the event of a bankruptcy. Senior debt holders rank first, then the companies' subordinated bondholders followed by preferred holders.

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.
Last Updated: August 25, 2008 16:11 EDT