Noted Bank Analyst Dick Bove Questions Fannie Mae “Fraud”

net worth sweep Fannie Mae Freddie MacBy User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Amidst an increasing number of lawsuits against the government, analyst Dick Bove is questioning if stockholder fraud has occurred at Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), which was placed into government conservatorship in 2008 and will be repaying the remainder of its outstanding government bailout within weeks.

“The government clearly believes that it is above the law because it rescued these two companies from bankruptcy,” Bove, vice president of financial sector research at Rafferty Capital Markets wrote in an investor letter Friday. “The courts may not believe that the government is immune to the laws, however.”

Did FDIC sell on insider information?

In yet another growing list of unseemly issues with management of the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) takeover, Bove points to an article by TheStreet.com’s Dan Freed questioning if the Federal Deposit Insurance Corporation traded on inside information from the US Treasury.

At issue is a December 20, 2010 internal government memo, first reported by the New York Times’ Gretchen Morgenson, that stated shareholders in the stock would not receive earnings from Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) in the future.  Three months after this memo was written, the FDIC began selling the vast majority of its shares.

The FDIC potentially selling on insider information is one of many issues.  Another issue, perhaps most controversial and also raised in the Freed article, is the seizing of private assets without compensation and debate. 

“Net worth sweep” sends stock dramatically lower, shakes out retail investors

At issue is an announcement made on August 17, 2012, known as a “net worth sweep.” This amendment to the conservatorship agreement unilaterally gave all future Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) profits to the US government on an indefinite basis.  This amendment is at the center of nearly 20 lawsuits, which claim it violates the fifth amendment of the U.S. constitution’s prohibition of the taking of private property for public use without just compensation.  After the “net worth sweep” was announced the Fannie and Freddie stock dove nearly 100% in value to near $1 per share.

Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), known to investors as a “safe” and “conservative” stock, had a high percentage of small individual investors, many of whom are said to have sold their ownership rights to hedge funds during the uncertainty. 

 “Americans have a right to a government which obeys in the law”

Shares are currently trading near $12 per share and Bove had predicted the stock could be worth as much as $18 per share. “Americans have a right to a government which obeys in the law and respects the rights of private property,” Bove said.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com