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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.
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