Of late, “What will happen to Freddie Mac (FRE) and Fannie Mae (FNM) preferred shareholders?” and “What will happen to Countrywide debtholders?” seem to be the most pressing questions on the minds of credit market participants.

At least to me recent history is not helpful in answering those questions. The bailout of Bear Stearns, in which creditors were made whole and common shareholders received not only something, but a bigger something than originally offered -- all at the expense of the US government -- seems unlikely to be repeated any time soon. Back in March, the bailout was viewed by most as an “event.” Clearly, since then, we have entered an “era.”

Given the magnitude of the credit losses both incurred to date and yet to be incurred, I believe market participants would be far better served by spending more time trying to figure out how these losses will be allocated and far less time trying to project whether those losses will total $500 billion, a trillion or even 2 trillion.

The reality is that at this point everyone, from the senior-most debtholders to the most junior-shareholders, to individual borrowers to the US and foreign governments, will incur losses. And as we have already seen with the various bank takeovers by the FDIC, each situation will be handled differently.

So how do I think these two specific burning issues will be resolved?

On Freddie and Fannie I expect that the government will invest in those entities at a capital level just below the now explicitly US guaranteed senior debt – think “super-senior" subordinated debt with warrants. To do anything different would provide a windfall to existing subordinated debtholders and preferred and common shareholders, which I believe would be politically unpalatable. At the same time, though, while common dividends will be eliminated, I expect that the existing preferred stock dividends and subordinated debt interest coupons will be paid. 

Why? Because most of those securities are owned by other financial institutions.  

I don’t think the US government will needlessly inflict more pain to the already wounded, given that it is already standing by to bail them out thanks to the FDIC insurance program. (I would also add, given that most banks have already re-classed their Freddie and Fannie preferreds to held-to-maturity from held-for-sale, cashflows on those securities matter a whole lot more than market values.) Finally, on the warrants, I expect that Treasury knows that Congress will demand some level of upside in exchange for the bailout.  As a result, common shareholders will be eviscerated.

On Countrywide, I have always felt that the question was never “Will Bank of America (BAC) buy Countrywide?” but “At what price will BofA buy Countrywide?” Well, it has now become clear that the price to be paid is going to come not just from BofA and Countrywide shareholders, but from Countrywide debtholders as well. My best guess is that BofA will drag the uncertainty out as long as it can, continuing to release more and more troubling data about the Countrywide portfolio.

Ultimately, though, I expect that BofA will tender for the bonds – at a substantial discount to par – and book some level of gain in the process. Remember, having closed the deal that no one thought he should close, Ken Lewis needs to find some way to save face with his board of directors.

But I hope by walking through these two examples, you can see that every deal will be different, and more importantly, given the magnitude of pain to be inflicted, everyone will be impacted.