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

Why Fannie and Freddie Differ From AIG

Of course such a move would have to be within reason. If they used the profits to double the pay of every member of Congress, it would be a huge scandal. But let's say they used the profits to reduce the principal on underwater mortgages. That would be controversial, but it seems less far fetched.

Regardless, whatever government officials decide to do with those excess profits, making sure there is enough money left over to benefit investors in penny stocks is likely to be pretty far down on the list.

Maybe the courts will get involved, as hedge fund investor John Hempton of Bronte Capital argues. There are lots of potential variables. That's why if I were going to speculate, I'd rather be first in line with a chance to make eight times my money, as preferred shareholders currently are, before the common shareholders earn a cent. That's especially true when the common shareholders, in the rosiest of outcomes, won't get a much better return than that.

Fannie Mae has 16 preferred issues outstanding, while Freddie has 24, according to a report published Wednesday by CRT Capital Group. Most of these trade at roughly 12 cents on the dollar. In other words, if you buy them today and they recover their initial value, you can make more than eight times your money.

Unless they recover all of their initial value, common shareholders get zero. Preferred shareholders must be paid in full before common shareholders see a penny.

Bronte Capital's Hempton argues that Fannie and Freddie traded at about $50 each per share in good times, which equates to $10 today since the government owns 80% of them. That's about nine times the $1.08 price where they closed on Wednesday. So even if you believe that Fannie and Freddie will return to their pre-crisis level of profitability, which seems like a rather large leap, you make nine times your money. That's just a little bit better than the preferred, with considerably more risk.

Fannie and Freddie have been political footballs throughout much of their exisence, and that status isn't likely to change any time soon. As long as it doesn't, the risk to investors remains high.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
2 of 2

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
AIG $64.12 0.00%
FNMA $2.35 0.00%
FMCC $2.25 0.00%
AAPL $121.30 0.00%
FB $94.01 0.00%

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs