Hedge Funds Lobby For Fannie Mae, Freddie Mac Privatization

Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shares have seen increasing action as large investors are showing increased interest in the mortgage giants’ preferred shares.

Hedge Funds Lobby For Fannie Mae, Freddie Mac Privatization

Jonathan Weil in his article in Bloomberg reports that hedge funds such as Paulson & Co have been lobbying for a privatization of the mortgage giants to enhance the value of preferred stocks they bought.

Fannie Mae And Freddie Mac Share Value

Bruce Berkowitz’s Fairholme Capital Management LLC issued a news release this week indicating it owned junior preferred shares of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)  and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with a $2.4 billion face value.

Earlier it was reported that Bruce Berkowitz’s Fairholme Capital and other leading investors such as John Paulson, Richard Perry and Claren Road Asset Management  cumulatively hold sizeable stakes totaling $2.4 billion in the two mortgage giants’ preferred stocks.

Johnathan Weil in his article in Bloomberg feels these investors have been lobbying for a privatization of the mortgage giants in order to boost their preferred share values. If Congress acts in their favor, it would boost the odds that lower-ranking common shares might also be benefited.

Last month, the American mortgage giant Federal National Mortgage Association (OTCBB:FNMA) announced that it will pay the Treasury Department $59.4 billion, after posting a record quarterly profit driven by rising home prices and declining delinquencies. The sister mortgage giant Federal Home Loan Mortgage Corp (OTCBB:FMCC) also recorded a net income of $4.6 billion and said it will pay the Treasury a $7 billion dividend for the quarter.

The stock price of the state-owned mortgage giants catapulted eight-fold this year and took their combined market capitalization to $48 billion.

Jonathan Weil however feels the beneficiary should be the government and not the owners of publicly traded shares.

Analogy with AIG Scenario

The government put the mortgage giants into conservatorship almost five years ago, and deferred the hard work of creating a new, viable housing-finance market. Now that the government has been keeping the mortgage giants alive for so long, this act has created a sense of entitlement among shareholders who feel they should be treated like those who were bailed out at American International Group Inc. (NYSE:AIG).

Jonathan Weil questions whether under normal circumstances any one would buy a financial institution like Federal National Mortgage Association (OTCBB:FNMA) having assets less than $177 billion of its liabilities and hence the net assets attributable to common shareholders had a deficit of $176.7 billion. Weil says this doesn’t justify the $1.99 value currently quoted in the stock market for Federal National Mortgage Association (OTCBB:FNMA).

Similarly Weil states that with common shareholders of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) having a $124.5 billion deficit, the mortgage giant’s stock price at $1.89 per share is not justifiable.

The mortgage giants’ share prices fell last week after reports indicated that two senators were drafting a bill to place the two mortgage giants under liquidation. In the event of liquidation, the proceeds from liquidation would first be paid to the government, subsequently to junior preferred owners if anything is left, and finally to common shareholders.

Wipe Out Junior Preferred and Common Shares 

Weil recommends that the mortgage giants’ junior preferred and common shares should be wiped out. The government’s implicit guarantee is applicable only to the companies’ bonds and not for common shareholders.

Jonathan Weil hence feels the common shareholders of the mortgage giants should bear the risk of loss inherent in such common shares.

About the Author

Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports