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Fannie, Freddie Still Have Enormous Potential

Looking ahead to an eventual political settlement, Nader wrote "the common shareholders of Fannie and Freddie need to organize and make their voices heard in Washington. Clearly, they should have a say in how Fannie and Freddie are managed -- in the board room and in Congress -- from here onward."

Bruce Berkowitz's Fairholme Capital Management on Monday said that its clients, including shareholders including shareholders of The Fairholme Fund (FAIRX) and The Fairholme Allocation Fund (FAAFX), "own approximately $2.4 billion par value of Fannie Mae and Freddie Mac Preferred Stock and are ready to help with a restructuring that accelerates the return of meaningful investment to the secondary mortgage market."

That equates to investments with market values totaling roughly $580 million, as the most liquid preferred issues of Fannie and Freddie trade for about 24 cents on the dollar.

Fannie Mae Series S junior preferred shares (FNMAS), with a $25 par value closed at $6.00 Monday. Freddie Mac's Series Z junior preferred shares (FMCKJ), with a $25 par value, closed Monday at $6.03.

Investors going into these junior preferred issues at Monday's closing prices have an opportunity to quadruple their investments if the dividends are restored, which would push the shares right back to par value, with market adjustments depending on how the shares' floating dividend rates compare to overall market rates when and if the dividends are restored. The shares could also jump right to par as soon as investors believe the dividends will be restored.

You may be shaking your head at how unlikely it might be for the junior preferred dividends to be restored, but the junior preferred shareholders could be "made whole" in another way.

Fairholme's letter on Monday contained some very interesting comments.

Fairholme (and therefore Berkowitz) said "there are no substitutes. Fannie and Freddie currently purchase or insure 6 out of every 10 home mortgages in America. Today, they are stronger than ever -- enabling the United States Treasury to rapidly recoup its temporary emergency investments in both entities."

Of course, those who wish to see Fannie and Freddie, with $5.2 trillion in assets, simply "go away," may forget that even if the GSEs were to be broken up, all that mortgage paper would still exist, and shareholders would have claims on those assets.
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