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
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Fannie and Freddie Shareholders Will Get Nothing: KBW

Fannie Mae reported a record first-quarter operating profit of $8.1 billion, and also announced on May 9 that it would pay the Treasury a second-quarter dividend of $59.5 billion, after recapturing most of its valuation allowance for deferred tax assets (DTA).

Freddie Mac reported first-quarter operating earnings of $4.5 billion and announced a second-quarter dividend of $7 billion to the Treasury.

Following the June dividend payments from Fannie and Freddie, the government will have received dividends totaling $131.6 billion on its combined GSE preferred investment of $189.4 billion.

Under the modified bailout agreements, Fannie and Freddie are required to pay all earnings in dividends to the government, above a $3 billion capital buffer for each company. There is no mechanism in place for either company to repurchase any of the government-held preferred shares. "While it appears likely that the Treasury will recoup its investment (in nominal terms) by the end of 2013 or early 2014, these payments do not reduce the principal amount of the preferred investment."

KBW introduced earnings estimates for the GSEs on Sunday. Factoring in the runoff of loan portfolios, "we still think both companies can generate normalized annual EPS of around $2," George wrote.

A Differing Opinion on Legal Prospects for Private Shareholders

Nader's comments, as well as a statement from Fairholme Capital, imply that common and junior preferred shareholders of Fannie and Freddie could take their claims to court, with the idea that the federal government has illegally seized private property, in denying dividends to share classes other than the government's senior preferred. The basis for this argument is the GSEs' return to profitability.

"If the GSEs were normal companies, we think this argument might be more persuasive," George wrote. "Instead, the companies are specifically chartered by the federal government and we think the courts will give the government far more deference in determining whether or not to pay a dividend to preferred shareholders even if the companies have paid back the taxpayers."

Fairholme Capital Management's statement also implies a way forward for Fannie and Freddie that could prove very lucrative to private shareholders, depending on the eventual political settlement.

"On behalf of the hundreds of thousands of Fairholme Funds shareholders who helped to rebuild American International Group (AIG), Bank of America (BAC), CIT Group (CIT), General Growth Properties (GGP), MBIA Inc. (MBI), and others after the Great Recession - we stand ready to do our part," the statement reads.

2 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
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!
DOW 16,943.81 +28.74 0.17%
S&P 500 1,967.57 +2.89 0.15%
NASDAQ 4,415.49 +19.2860 0.44%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs