Money Morning’s Keith Fitz-Gerald says the government’s intervention, however, could “blindside” millions of investors who may have indirect ownership in Fannie and Freddie, thanks to shares held in their mutual funds, 401(k) plans, pension funds or annuities.

Since last year, both Fannie and Freddie have been the focus of much speculation, with analysts figuring the government would take over and “rescue” the beleaguered mortgage giants. As we’ve reported to you here in Money Morning, most concerns focused on how the government would actually take over the two government sponsored enterprises (GSEs), and whether or not the process would eliminate the common stock and preferred shares of both.

U.S. Treasury Secretary Henry M. Paulson & Co. ended the betting on that issue on Sunday, announcing that neither class of stock will be eliminated, as some had feared – although the point may be moot. Especially since a “rescue” is not going to stop the meltdown of the nation’s $12 trillion mortgage market (in which about half the paper is backed by Fannie and Freddie, incidentally).

As part of the government’s plan, shareholders have been stripped of both their corporate-governance powers and management rights, while both common and preferred shareholders saw their income eliminated when the government ended dividend payments to both.

This could lead to serious – and perhaps irreparable – declines in the portfolios of a number of regional banks, mutual funds and major insurance companies, which used holdings in both companies to shore up assets by virtue of the stability they offered and the income they provided.

The list of “at risk” names is as distinguished and it is long.

Some, like longtime superstar fund manager William “Bill” Miller of Legg Mason Inc. (LM) fame, were no doubt shell-shocked yesterday (Monday). And with good reason. Fannie’s shares dropped another 81.38% yesterday, while Freddie’s were down an additional 82.75%. All told, both stocks are down 99% from their respective 52-week highs.

Miller – an avowed value investor – displayed real brilliance in his ahead-of-the-crowd decoding of the business models of, and inherent value in, such New Economy stalwarts as Amazon.com (AMZN) and direct seller Dell Inc. (DELL). And he’s best known for beating the Standard & Poor’s 500 Index for 15 straight years – the mutual fund sector’s version of Cal Ripken Jr.’s “Streak.” But Miller’s streak ended in 2006 and he’s yet to regain his former momentum. Bets like those he placed on Freddie can’t help.

At a time when Fannie and Freddie have lost most of their value, most institutional investors have been net sellers or active hedgers, at the least. We don’t know whether Miller hedged his bets; we only know that he bet big.

According to a CNNMoney.com report, Legg Mason owned 15 million Freddie Mac shares at the end of 2007, when the stock was trading at $34 a share. Legg’s holdings climbed to 50 million shares in the first quarter, a point at which the fallout from the Bear Stearns collapse had helped push Freddie’s shares down into the teens. As of July 31, when the Freddie Mac’s shares were trading at less than $10 each, Legg and Miller actually held 80 million shares of the mortgage GSE.

In other words, Miller’s been doubling down – and in a big way. And the bill has now come due. As of Dec. 31, 2007, Legg Mason held paper worth a cool $1.7 billion. As of yesterday, it’s worth less than $53 million. And we’re not even counting the losses on any shares he’s picked up since then. It’s going to be hard for him to argue to his shareholders that this is anything more than an unmitigated disaster.

Of course, we hope he’s engaged in systematic hedging along the way – a question we won’t be able to answer until the next set of quarterly reports come out. We’ll want to know – as will scores of investors who thought they’d escaped this catastrophe.

… So, the bottom line here is that last weekend’s so-called “rescue” is really nothing more than the government playing “pass the hat.”

Source: Bailout Blues: Beware of the Unseen Fallout From the Fannie/Freddie “Rescue” Plan, Jim Rogers and Warren Buffett at Odds on Fannie/Freddie Bailout

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