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In December of 2007, several underwriters, including Goldman Sachs, Merrill Lynch, Banc of America Securities, Bear Stearns, JPMorgan Securities, Citigroup Global Markets, Deutsche Bank Securities, Morgan Stanley and UBS, underwrote an offering of Fannie Mae Preferred Stock, Series S. However, in connection with the offering, we believe that these underwriters knew or recklessly disregarded that Fannie Mae was massively undercapitalized, due to Fannie Mae’s over-concentration in subprime investments and Alt-A mortgages. These assets were not properly accounted for in violation of Generally Accepted Accounting Principles (“GAAP”).
The share price of Fannie Mae Preferred Stock S has significantly declined about 90%, from the IPO price of $25 per share to about $2.05 per share, as of October 16, 2008.
Further, brokers and financial advisors may have purchased an unsuitable amount of Fannie Preferred Stock S in their clients’ accounts, thereby creating a significant over-concentration. Over-concentration exists when 10% or more of the investment portfolio is invested in a single security or sector.