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Barney Frank Addresses Fannie and Freddie Shareholders

NEW YORK ( TheStreet) -- Former Massachusetts Rep. Barney Frank says private shareholders in Fannie Mae (FNMA) and Freddie Mac (FMCC) "would be entitled to a pro-rated share" of the entities' profits if there is money left over after they repay the government. However, he says he "has little sympathy with the vultures" betting on a rebound in shares of the government-sponsored enterprises (GSEs).

While Frank is no longer a member of Congress, his views may offer an indication of how Democrats who still hold public office are likely to assess the claims of preferred and common shareholders in Fannie and Freddie.

"The problem of having a surplus left over in Fannie and Freddie after we've settled all the debts is a problem I'd love to have. I'm skeptical that we will," Frank said.

Others who are likely following the situation more closely are less skeptical, however.

CRT Capital Group analyst Michael Kim estimated in a March 20 report that Freddie will be able to repay the Treasury by 2014, while he believes Fannie can do so by 2015 to 2016.


Indeed, Fannie Mae, which is set to report its fourth-quarter earnings this week, had to delay the report due to unexpectedly strong results which may allow it to recapture at least a portion of a more than $60 billion deferred tax benefit.

Several hedge funds have been betting on a rebound in Fannie and Freddie shares ever since shortly after the GSEs were put into conservatorship by then-Treasury Secretary Hank Paulson in 2008 at the height of the subprime mortgage crisis.

The question of whether it makes sense to invest in beaten-down preferred or common shares in Fannie and Freddie is not merely financial, however. Politics is likely to play an important role. That's because politics will help determine what profits Fannie and Freddie report, where those profits go and whether the GSEs will be privatized once the government has been paid back.

Indeed, the profits of Fannie and Freddie are continually at risk of being used as a "piggy bank." In May, Senator Dianne Feinstein (D-Calif.) proposed using increases in the insurance fee charged by Fannie and Freddie to help "underwater" home owners refinance their mortgages. In December, the House of Representatives voted to use fee increases to pay for a student visa program. Proposed bipartisan legislation called the "Jumpstart GSE Reform Act," offered last month by Senators Mark Warner, (D-Va.,) David Vitter, (R-La.), Elizabeth Warren (D., Mass.) and Bob Corker (R., Tenn.) intends to address the "piggy bank" issue. It would prevent the use of revenue from increased guarantee fees from being used to offset other government spending.

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