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Fannie, Freddie Shareholders Remain in Limbo

WASHINGTON ( TheStreet) -- Holders of common stock of Fannie Mae (FNMA) and Freddie Mac (FMCC) are in an unenviable position, but even though the government hasn't given them any signs of support, it hasn't explicitly said they'll be wiped out, either.

Treasury Secretary Timothy Geithner discussed his housing-finance proposal at the Brookings Institution in Washington, D.C., on Friday, but didn't mention how shareholders will be treated.

Those investors have been holding on for more than two years, hoping that conventional wisdom is wrong. In the face of multibillion-dollar deficits in Fannie and Freddie's net worth each quarter -- and $150 billion in debt to taxpayers -- common shareholders are still hoping for signs that the government will take steps to bolster their position, rather than send them to the stock market doghouse.

The release of the Obama administration's white paper on housing-finance reform on Friday essentially asked them to hold on a little longer for a clear signal.

The U.S Treasury Department didn't address the question of how common shareholders should be treated, though it did criticize the "private shareholder structure," which "encouraged management to take on excessive risk" and, ultimately "caused them to fail." It also proposed "an orderly and deliberate wind down" of Fannie and Freddie while a new system is formulated and put into place.

Beyond that, shareholders have been getting mixed signals.

The Federal Housing Finance Agency delisted the stocks from the New York Stock Exchange last year but kept them trading on the pink sheets. On Wednesday, a Freddie Mac director said publicly that the company has no fiduciary duty to shareholders . But the companies appear have some modicum of political capital -- however minor -- with former presidential candidate Ralph Nader writing a testy op-ed in the Wall Street Journal that shareholders ought to be protected.

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Legal experts say that the government already has a wide array of options on the table to deal with Fannie Mae and Freddie Mac. Those options span the gamut from fully liquidating the firms -- thereby leaving shareholders with little or no recourse -- all the way to a "re-IPO," which would convert Treasury's preferred stakes into billions of new common shares that could be offered to private investors over a period of time, a la American International Group (AIG - Get Report) or Citigroup (C).

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