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NEW YORK (
Fannie Mae (FNMA) and
Freddie Mac(FMCC) common shares are up 200% in four days on hopes they could offer a payoff similar to that seen in
AIG(FMCC) but there is a key difference investors need to keep in mind.
Fannie and Freddie differ from AIG in that the shareholders in the government-sponsored enterprises -- both common and preferred stock -- currently have no rights whatsoever.
That's right. It sounds hard to believe, but that is what happened on Aug. 17, 2012, when the Treasury
announced it would "replace the 10 percent dividend payments made to Treasury on its preferred stock investments in Fannie Mae and Freddie Mac with a quarterly sweep of every dollar of profit that each firm earns going forward."
Among the objectives that Treasury announced would be achieved by this move is "making sure that every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms."
You weren't hallucinating, and you aren't in China. If every dollar of earnings goes to taxpayers, that means nothing goes to investors.
To change that situation, it requires an act of Congress or the Obama Administration or the courts, and there are currently no proposals -- none that have been made public anyway -- to compensate investors in the GSEs.
Not only haven't any proposals been made, no public official has said a word about the rights of investors in Fannie and Freddie.
While AIG investors weren't a priority either, there was never anything controversial about it being a public company. The controversy started when it got bailed out. Returning it to the private sector was hailed as a triumph.
Fannie and Freddie's status as semi-private-semi-public companies, on the other hand, always reeked of corruption, so no politician wants to take credit for the idea of returning it to that state.
That could change. Lots of investors, including a few hedge funds, are betting that it will.
Still, assuming it does change, Fannie's and Freddie's profits won't be determined by the free market. How much Fannie and Freddie charge for guaranteeing mortgages, for example, or what type of mortgages they agree to guarantee are determined in large part by policymakers.
In other words, half the profits could disappear tomorrow if policymakers decide they want to use them for any purpose whatsoever.