Fannie Mae and Freddie Mac Profits Up For Grabs?

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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.

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5 Comments on "Fannie Mae and Freddie Mac Profits Up For Grabs?"

  1. Richard Thompson | May 19, 2014, 11:27 pm at 11:27 pm |

    I’ll try to be nice. As of right now my TD Ameritrade account says institutional investors hold 13.65% of Fannie Mae’s common stock. Retail investors own 86.35% of company. What does that tell you about the credibility of the author’s claims

  2. The writers perspective is inane. If there was a bankruptcy, maybe the common would have been wiped out, but a bankruptcy court would have decided the value and maybe there would have been value for the common. We will never know. But I do know that since bankruptcy was not declared, and we still live in America, where we do have a constitution, property rights exist. With that said, the original GSE preferred stocks are senior to the governments common claim. It follows then , that if since the government has been paid back, and no bankruptcy existed, the holders of the original GSE preferreds should be made whole. Not because someone thins so, but because its the law. And if the government exercises the warrant, that means that the common has value if the courts don’t decide that the government was over compensated for the role they played. Remember, many of the money losing actions of the GSE firms were forced on them after the government illegally seized them. It is not inconceivable that penalties could be assessed in addition to the value

  3. What an asinine analysis this article is. An investor is an investor, no matter when the shares we’re purchased. If this was Citigroup, AIG, or GM, the shareholders would get their due. The government bailed them out and the shareholders weren’t disenfranchised of their ownership rights. So why should shareholders of fre n FNMA be subject to such treatment. The government could have put them in receivership and stopped them from trading in all markets but they didn’t. Now after the fact it’s illegal to claim the shareholders of the GSEs are taking average of the situation. Anybody with commonsense, knew that the GSEs maintained trillions of dollars in assets. The stock may have appeared worthless on the surface, but multi-trillions if dollars don’t evaporate with the share price.

  4. “From my perspective, only original (pre-bailout) shareholders who held on should be considered to receive some small percentage any current or future profits.”

    When did the free market begin classifying stockholders based on date-of-purchase? Sure, there are differences between classes of shareholders (preferred vs. common) but time and date of share purchase has no relevance. For example, assume two shareholders bought shares of the GSEs in the low sub-dollar range post-2008. One sold them when they reached their high of $6 to make a handsome profit. The other held in hopes of a larger payout. Do you propose that the resolution you suggest above retroactively targets the shareholder who made a profit by selling early? If not, then your argument is critically flawed. It is impossible to treat all shareholders of the same class fairly based on transaction date.

  5. Im not a ” Hedge Fund ” I am a small time American Tax Payer, Who Could Of Bought AIG For .75 Cents, Yet I Figured These GSE’s Were Better, But Gee’s If GM Got Away With 11 Billion Reduction Of Bailout Monies Before Getting Released From Conservatoire-ship, The Why Would FNMA/FMCC Be Excepted To Over Pay.

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