Reply #14: Fannie/Freddie takeover bad for community banks [View All]

NEW YORK (CNNMoney.com) -- The takeover of Fannie Mae and Freddie Mac is likely to cause big problems for hundreds of community banks nationwide and could lead to a new round of bank failures.

That's because many smaller banks had a large amount of funds tied up in the preferred shares of Fannie and Freddie, depending on the dividends for reliable income, and the value of those shares to meet the capital levels required by regulators.

Now the dividends have been scrapped and the share values are in question.

"For many banks it was a safe and steady income stream," said Brian Gardner, senior vice president and chief political analyst for Keefe, Bruyette & Woods, an investment bank that specializes in financial firms. "It's cutting off an important source of income for the banks at time when income is not easy to come by."

http://money.cnn.com/2008/09/07/news/companies/fannie_freddie_aftershocks/?postversion=2008090717