This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Fannie and Freddie's $37 Billion Question

The hedge fund managers, however, argue the best solution for preferred investors is to revive the shares and all cite Fannie and Freddie's improving balance sheets in making their case.

Kao and Derek Pilecki of Gator Capital Management in Tampa, Fla., both make certain pragmatic-sounding political arguments that going back to some version of a public-private model is the least objectionable of several bad options.

Separately, John Hempton of Bronte Capital has a plan to gradually phase out the Government Sponsored Entities (GSEs) that he believes would pay back the government and give him some nice gains on his preferred equity stake.

The fund managers' proposals for Fannie and Freddie and degree of conviction vary slightly from one to the next.

Kao, who earned 268% returns for Akanthos in 2009 by buying General Motors (GM - Get Report)shares for pennies on the dollar, believes GM's initial public offering could provide a template for an IPO of Fannie and Freddie, in which some of the government's debt and/or preferred stake could be converted to equity in a reorganized company.

Pilecki, a former interest rate risk analyst at Fannie Mae, says Fannie and Freddie preferred shares are his largest positions, accounting for some 5% of his portfolio.

"The new business they're putting on is profitable and I also think some of the charges they've taken in the past have been overly conservative," he says.

Hempton believes the government exit strategy for Fannie and Freddie should be to force them to gradually increase the price they charge for mortgage guarantees until they eventually lose all their customers to the private sector. As the GSEs are phasing themselves out of existence, Hempton believes they would earn enough money to pay back the government.

However, Hempton argues this is not the plan favored by big Wall Street banks like Citigroup (C - Get Report), Bank of America (BAC - Get Report), JPMorgan Chase (JPM - Get Report) and Goldman Sachs (GS - Get Report). Instead, he says Wall Street favors a plan to create several mini versions of Fannie and Freddie that compete with each other to offer low-priced government guarantees on mortgage backed securities.

2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
GS $207.05 -0.37%
C $54.94 0.91%
BAC $16.73 1.10%
GM $36.34 0.43%
JPM $66.27 0.29%

Markets

DOW 18,057.59 +17.22 0.10%
S&P 500 2,116.66 +4.93 0.23%
NASDAQ 5,095.3620 +12.4330 0.24%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs