According to Matthew Yglesias of Vox, four hedge fund managers — Bill Ackman, Bruce Berkowitz, John Paulson and Richard Perry — are leading the charge (along with consumer advocate Ralph Nader) to re-privatize Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) so they can make obscene profits off the back of taxpayers.
Yglesias’ article makes some persuasive arguments, and contains more than a small measure of truth, but ultimately fails to be persuasive given the one-sided nature of its argumentation.
Fannie Mae and Freddie Mac profitable today
The key point here is that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have both become profitable in the current low interest rate macro-environment and given federal guarantees of their debt. A modest, if regionally spotty, revival in the housing market has also helped the government-sponsored enterprises swing yo a profit over the last year or two. Analysts also point out that Fannie and Freddie are likely to be cash cows for some years to come given the slow recovery mode of the U.S. economy.
Hedge fund’s plan
The stock of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) dropped to just pennies a share after the 2008-2009 financial crisis and the government bailout of Fannie Mae and Freddie Mac. However, both companies continued to trade “over the counter” as a penny stock.
As Yglesias puts it, “Buying a share of Fannie Mae and Freddie Mac was essentially taking a flier on the proposition that the government would, in the future and for no particular reason, start paying out dividends to whoever bought the worthless stock.”
He points out that this situation attracted the attention of a few hedge fund titans who thought they might just have the political muscle to make re-privatization of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) a reality.
Yglesias says that these hedge funds bought up a good chunk of Fannie Mae and Freddie Mac shares, and are now — along with other GSE shareholders including Ralph Nader — are trying to convince either courts or Congress to give them the profits being spun off. The GSE shareholders argue that rather than the profits going to the Treasury, the profits should stack up in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s accounts and then the GSEs should be “re-privatized” to create a functioning mortgage market. Yglesias says this is basically an attempt by the GSE shareholders to rip off the taxpayers as they have no legal or moral claim to the money.
What is fair?
While it is certainly true that the government bailed out Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and should therefore be enjoying the lion’s share of any future profits, GSE shareholders should have some “rights” in terms of the value of their original investment, so completely locking them out also seems unfair.
From my perspective, only original (pre-bailout) shareholders who held on should be considered to receive some small percentage any current or future profits. Those like the hedge funds who bought Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shares as an investment at a later date should not, however, be allowed to profit from the taxpayers investment, and should just be paid out at the price they paid for the shares or a very modest profit.
