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

Obama AIG Fix-It Man Bets on Fannie and Freddie Turnaround

The Freddie Mac "Z" shares (FMCKJ), one of the more widely traded preferred issues, have bounced around dramatically over the past two years after losing 99% of their value when the Treasury put the GSEs into conservatorship in 2008. The "Z" shares have more than doubled in the past month and more than tripled over the past year as the GSES have shown ever-increasing profitability. They are still worth less than 20% of their original value, however, and Keefe, Bruyette and Woods calls them a " total fantasy."

Whether a big payoff in GSE preferred shares depends upon policymakers is a matter of debate. Millstein actually believes a liquidation of the GSEs might be the surest way for his preferred stake to pay off.

That's because Millstein says the statute under which Fannie and Freddie would be liquidated incorporates an "absolute priority rule," like the U.S. bankruptcy code.

"If there's an excess of cash in the liquidation and all creditors have been paid and the government's been paid then more likely than not it goes to the junior preferred," Millstein says. (The "junior" preferred shares are those in which Millstein and hedge funds are invested, which in a traditional bankruptcy would be next in the line of creditors after the government's senior preferred shares.)

On the other hand, Millstein says, "If my plan were enacted, I don't know, frankly, how it would play out because my plan is based on the government has to get paid first in the AIG-like restructuring and so if it's an AIG-like privatization, whoever's sitting in my chair at Treasury has to be confident that he's got enough of the common stock to pay the outstanding amount of the senior preferred back in full. So when I was sitting in that seat I figured if I had 92% of the common, the Treasury Dept. and the taxpayers would be protected. I don't know what this guy's going to think and I don't know what market conditions are going to look like when that privatization is started in 2015 or '16 and who knows what the junior preferred would be entitled to."

Whatever policymakers ultimately decide, at least one other investor, Bronte Capital's John Hempton, believes the Fifth Amendment prohibition of the taking of private property for public use without just compensation is what will protect his investment in Fannie and Freddie preferred shares.

Specifically, it was the Aug. 17 amendment to the 2012 Treasury's GSE preferred stock purchase agreements that Hempton believes will ensure that he gets paid.

"I do not like the original 2008 takeover -- but I do not think it constituted regulatory takings. Indeed they were very careful," Hempton wrote TheStreet via email. "Last year they were sloppy," he added. (To see what former House Financial Services Committee Chairman Barney Frank, who authorized the 2008 government GSE takeover, thinks about Fannie and Freddie shareholders click here.)

Millstein doesn't agree with Hempton on the Fifth Amendment issue, though the potential professional boost the turnaround adviser could get from being assigned to take Fannie and Freddie private looks to be potentially far greater than whatever he is likely to earn on the preferred share investment.

"If somebody actually decided to implement our plan and Congress passed it, this is -- like AIG -- one of the largest restructurings in the history of the world that will need to be implemented: to privatize these companies and recapitalize them. And it wouldn't hurt Millstein & Co. to have been associated with it."

-- 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
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!
SYM TRADE IT LAST %CHG
FMCKJ $4.99 0.00%
AIG $57.43 0.00%
FNMA $2.82 0.00%
FMCC $2.68 0.00%
AAPL $124.75 0.00%

Markets

DOW 17,826.30 -279.47 -1.54%
S&P 500 2,081.18 -23.81 -1.13%
NASDAQ 4,931.8150 -75.9760 -1.52%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs