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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

'Total Fantasy' Fannie, Freddie Preferreds, says KBW's Gardner (Update1)

(Updated from 6:00 a.m. ET with Fannie Mae's earnings Tuesday)

NEW YORK (TheStreet) -- Expectations that Fannie Mae (FNMA) and Freddie Mac (FMCC) will pay out on their preferred shares is "total fantasy," says Brian Gardner, senior vice president of Washington Research at KBW.

"The companies are not returning to their former status," Gardner said in an interview with TheStreet on Monday. A political change after the mid-term elections might change things two years from now, but the KBW analyst says there's broad consensus to wind the agencies down or replace them with something else.

Betting on a scenario where the agencies make a payment on the preferred shares is "highly speculative," Gardner added. "It's based on some good financial analysis but it disregards political reality."

Fannie Mae reported earnings Tuesday morning, posting a record $17.2 billion profit, reversing its nearly $17 billion loss in 2011, on the back of a housing recovery.

"We expect to remain profitable for the foreseeable future and return significant value to taxpayers." Susan McFarland, executive vice president and chief financial officer said in a statement.

The agency also said it expects to release the valuation allowance on its deferred tax asset as early as the first quarter of 2013. Fannie Mae had a valuation allowance of $58.9 billion as of Dec. 31, 2012.


The recapture of Fannie's DTA would provide a major boost to the company's effort to redeem about $117 billion in preferred stock held by the U.S. Treasury, for bailout assistance since September 2008.

Fannie Mae's shares were up over 18% in early trading Tuesday, to 84 cents. Freddie Mac's shares were up 14% to 87 cents.

Preferred shares of both mortgage giants have also been quite volatile. For example, Fannie's preferred series E (FNMFM) shares, with a par value of $50.00 and a coupon of 5.10%, were up 46% in early trading to $0.50. Freddie Mac's preferred series Z (FMCKJ) shares, with a coupon of 5.375% and a par value of $25, were up 15% in early trading, to $3.90.

Both common shares and preferred shares of Fannie Mae and Freddie Mac have jumped in recent weeks, amid speculation that the government-sponsored enterprises might soon be able to repay the Treasury, and also have some money left over for shareholders who were wiped-out in the 2008 bailout.


Some hedge funds have held on to preferred shares of the housing giants on a political bet that the government will stop seizing all the profits of Fannie and Freddie and show some willingness to make payments to preferred shareholders.

The preferred shares are seen as a better bet than common shares, which have the lowest priority in the order of repayment.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,919.31 -41.26 -0.24%
S&P 500 1,970.21 -8.13 -0.41%
NASDAQ 4,422.03 -27.5340 -0.62%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs