Once it makes the dividend payment announced on Thursday, Fannie Mae will have paid the Treasury $95 billion on the $117.1 billion in senior preferred shares held by the government. That is a very high yield for an investment of less than five years.
If Fannie manages to remain similarly profitable through the end of this year, it is possible its dividends to the government may come close to or even exceed the amount of the bailout investment by the end of 2013.
How Much Is Enough, and What About the Junior Preferred?
No matter how much in dividends the GSEs managed to pay the government, there is no mechanism in place for either to repurchase any of the senior preferred shares held by the Treasury.
Meanwhile, investors holding the GSEs junior preferred shares have had their dividends suspended since September 2008.
Judging from the market action, it seems that investors expect to realize value from the preferred shares, either from a restored dividend, or maybe from some sort of payout if and when President Obama and Congress come to an agreement for the GSEs ultimate structure.
Fannie's preferred series E shares, with a coupon of 5.10% and a par value of $50.00, closed at $9.00 on Thursday, rising over 16% for the session and nearly sixfold from $1.60 at the end of 2012.
Freddie's preferred series Z shares, with a coupon of 5.375% and a par value of $25.00, were up 7.5% on Thursday to close at $5.05. The Freddie preferred series Z shares have risen 186% from $1.75 at the end of last year.
To illustrate just how lucrative speculative investments in GSE junior preferred shares might be, consider the potential yields if the dividends are restored.
Fannie's preferred series E shares are supposed to pay annual dividends of $2.25 a share. If the dividend were restored, an investor who went in at Thursday's close would see a dividend yield of 25.00%.
The Freddie preferred series Z shares are supposed to pay annual dividends of $1.34 a share. If the full dividend were restored, an investor who purchased the shares at Thursday's close would be looking at a dividend yield of 26.53%.
Fannie's common shares were down 3% to close at 87 cents, while Freddie's common shares declined 4% to close at 85 cents.
-- Written by Philip van Doorn in Jupiter, Fla.