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

Senators Give Hope to All GSE Shareholders

With Fannie and Freddie paying such large dividends to the government, while the dividend payments on the junior preferred shares remain suspended and while the GSEs aren't allowed to repurchase any of the government-held preferred shares, the senators may be responding to growing anger among investors.

Two high-profile investors recently discussed their holdings in shares of Fannie and Freddie, pointing the way to possible lawsuits against the government, depending on whether Fannie and Freddie are allowed to move past the bailout and go on operating, or on the precise way they are "dissolved."

Ralph Nader in an op-ed piece published in the Wall Street Journal on May 24 said he was a shareholder in both GSEs and that common shareholders of Fannie and Freddie should fight against the federal government's "great Fannie and Freddie rip-off."

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."


The comments from Fairholme could point the way to a deal under which government-held preferred shares could be converted to common shares, thus making the earnings of Fannie and Freddie available to all shareholders, and enabling the GSEs eventually to repurchase the government-held preferred shares. This would be similar to the way in which the massive bailout of American International Group (AIG - Get Report) was resolved.

In a note to clients on Tuesday discussing the senators' draft bill, FBR analyst Edward Mills wrote "while this legislation faces significant hurdles and GSE reform is still a long ways off, this legislation is significant as it marks the most constructive bipartisan effort yet to move Fannie and Freddie beyond conservatorship."

According to Mills, the inclusion of any consideration for non-government shareholders of Fannie and Freddie at this early stage of the political process could lead to a "negative press reaction."

"Should the press develop the narrative that Congress is rewarding 'speculative bets' on these securities, we could see efforts to change or modify this provision," Mills wrote. "Not knowing how the final bill will be drafted, it is also difficult to determine what, if any, economic value would be left after Treasury has been repaid its investment."

A knee-jerk hostile press relation to the "evil investors" holding junior preferred and common shares of Fannie and Freddie may make for a rough ride in Washington, but the senators will also have voters in mind. After all, Fairholme in its announcement on Monday referred to "thousands of shareholders" of mutual funds holding GSE shares.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AIG $59.51 -0.62%
FNMA $2.61 -0.19%
FMCC $2.52 0.40%
AAPL $131.04 -1.10%
FB $79.91 -0.78%

Markets

DOW 18,083.04 -148.98 -0.82%
S&P 500 2,109.87 -16.19 -0.76%
NASDAQ 5,038.9090 -50.4530 -0.99%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs