We usually like to wait until the ship sinks to the ocean floor before offering distress plays, but we jumped the gun a few weeks ago with a speculative recommendation on Fannie and Freddie preferreds. Our gut feeling is that, come hell or high water, the guvvamint isn't about to let the GSEs sink into oblivion. So far, so good. We asked our friend Zane Binder, erstwhile car reviewer and armchair portfolio expert, for his take. He sees a play in these issues, albeit a speculative one, and writes as follows: 'Few can see the future, but Fannie Mae and Freddie Mac, the government sponsored mortgage enterprises (GSEs) trapped in subprime Hell as surely as if glued to flypaper, can't see their own past. Together these GSEs own or control more than half the nation's mortgages. Worse, both have issued releases questioning their own past financial statements. Standard and Poor's recently put the preferred stock and subordinated debt of the two giants on credit watch, which loosely means there's a 50 percent chance their circa 'A' credit ratings might be history within three months. Does their situation offer opportunities for bears, bulls or both? Possibly, especially considering their common stock dividends will almost certainly vanish in the near future. Consider the following: -- Neither GSE apparently offers cumulative preferred stock, meaning if they decide not to pay a preferred dividend it doesn't sit as booked debt to be paid later. A missed preferred dividend is just that: missed, forever. -- Some of the GSE preferreds are variable-rate. Much is tied to the London Interbank Rate and, additionally, the moon's phases. Few can decipher what the GSE's accountants have wrought. -- Many GSE preferreds can be redeemed at a fixed price, presently an extremely attractive figure, should Freddie or Fannie so
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