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Wall Street Journal Misses Fannie Preferred Point

Fannie Mae spokesman Andrew Wilson confirms there is no mechanism in place for Fannie Mae to repurchase any of the senior preferred shares held by the Treasury, no matter how high the dividend gets. He also says, "it is right and appropriate that our profits go to the taxpayers."

It certainly makes sense for Wilson to say that, but some quick back-of-the-envelope calculations show that the government may soon be looking at a shockingly high yield on its preferred investment in Fannie Mae.

Fannie Mae's second-quarter dividend to the government will be based on its first-quarter results. If the company were to recapture the full DTA, while also paying the same $4.2 billion dividend it did for the previous quarter, the total first-quarter dividend would be $63.1 billion. If we add that to the $35.6 billion in dividends already paid, we potentially have $98.7 billion in dividends paid to Uncle Sam through the second quarter.

That is a mighty hefty return for an investment of less than five years. Based on the full $117.1 billion in preferred shares, the dividend would make for an annual yield of 17% over a full five-year period. Of course, with the actual period being less than five years, and the government's investment slowing building up to the $117.1 billion, the actual yield would be higher.

And even if this all happens through the second quarter, there is no end in sight, since Fannie Mae's agreement with the Treasury has no expiration date.

Freddie Mac is in a similar position, owing the federal government $72.2 billion as of Dec. 31, with a DTA valuation allowance of $31.7 billion. Freddie reported net income of $4.5 billion for the fourth quarter and $11 billion for all of 2012. The company paid the U.S. Treasury dividends totaling $23.8 billion in dividends from 2008 through 2012.

Even though dividends on junior preferred shares in Fannie and Freddie have been suspended since the companies were taken under government conservatorship, and even though there is no end in sight for the Treasury preferred, some investors see value in the junior preferred shares.

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