The 5 step downgrade of Fannie and Freddie preferred stock makes it seem inevitable that the Federal Reserve will have to step in and recapitalize Fannie and Freddie.

Fannie Mae and Freddie Mac’s $36 billion in preferred stock was downgraded to the lowest investment-grade rating by Moody’s Investors Service, which said the increased likelihood of “direct support” from the U.S. Treasury may devalue the securities.

The ratings were lowered five steps to Baa3 from A1, New York-based Moody’s said today in a statement. Moody’s kept its Aaa senior debt ratings on Fannie and Freddie stable and affirmed the subordinated debt because the Treasury will likely make sure the companies continue to make interest payments in any bailout.

A Wall Street Journal article states, “The downgrade further stoked fears that the U.S. Treasury might have to acquire stock in Fannie and Freddie, effectively taking control” and that indeed seems the most likely scenario. Fannie and Freddie will become essentially partially-owned subsidiaries of the Fed.

These are historic times.

That’s not a good thing.