This Day On The Street
Continue to site right-arrow
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!

Wall Street Journal Misses Fannie Preferred Point

Stocks in this article: FNMA FMCC

NEW YORK ( TheStreet) -- The government is going to make a lot of money on its investments in Fannie Mae (FNMA) and Freddie Mac (FMCC) and junior preferred shareholders may eventually get in on the gravy.

In a Heard on the Street article Wednesday, the Wall Street Journal rightly said, "there is no plan, or mechanism, in place" for the company to repurchase $117.1 billion in preferred shares held by the government. But the Journal misses the point that investors in junior preferred shares of Fannie and Freddie may be see a huge payoff over the long term.

Fannie Mae on Tuesday reported record profits for the fourth quarter and for all of 2012, and said it could see a potential $58.9 billion windfall from the recapture of its valuation allowance for deferred tax assets (DTA), as early as the first quarter.

Fannie Mae's shares rose 13% on the news, closing at 90 cents on Tuesday. Sister mortgage giant Freddie Mac saw its shares rise 14% to close at 87 cents. Both Fannie and Freddie -- collectively known as the government sponsored mortgage enterprises -- were taken under government conservatorship at the height of the real estate crisis in September 2008.

Under its initial agreement with its regulator, the Federal Housing Finance Agency and the U.S. Treasury, Fannie Mae agreed to pay quarterly dividends at an annual rate of 10%, even if it failed to turn a profit, which forced the insolvent company to make multiple draws from the Treasury in order to continue operating and cover the dividends. Then in August 2012, after Fannie posted profits for the first and second quarters, the agreement with the Treasury was amended so that beginning in 2013, the company would no longer pay a 10% dividend on the government-held preferred, but instead would pay an amount based on the company's "net worth as of the end of the immediately preceding fiscal quarter."

Fannie Mae is now, essentially, paying all of its profits to the Treasury, while maintaining a "capital reserve" of $3 billion, which declines by $600 million a year, until it reaches zero in in 2018.

If and when the company recaptures some or all of the $58.9 billion DTA, that amount will be added to the previous quarter's profit, less the capital cushion, for a large dividend payment to the government.

1 of 3

Select the service that is right for you!

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 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • 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