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Fannie, Freddie Shareholders Roll Dice, Sue Uncle Sam (Update 1)

Common shares of Fannie Mae closed at $1.91 Monday, rising 635% since the end of 2012, when the shares closed at 26 cents. Freddie Mac's shares closed at $1.78 Monday, up 585% since the end of last year, when they also closed at 26 cents.

In afternoon trading Tuesday, Fannie's shares were up 6% to $2.02, while Freddie's shares were up 4.5% to $1.86.

The most liquid junior preferred GSE shares have also risen considerably this year. Fannie's preferred Series S shares (FNMAS), with a face value of $25, closed at $5.14 Monday, up 208% from $1.67 on Dec. 31. Freddie Mac's preferred Series Z shares (FMCKJ), with a face value of $25, closed at $5.35 Monday, rising 206% from $1.75 at the end of 2012.

Fannie Mae's preferred Series S shares were up 6% in afternoon trading to $5.45, while Freddie Mac's preferred Series Z shares were up 3.6% to $5.54.

The lower return for the junior preferred shares underlines their preference over common shareholders for dividends and in the event of liquidation, although KBW analyst Bose George in a report on Sunday wrote that it was very unlikely for non-government GSE shareholders to realize any value at all from their investments.

Despite their return to solid profitability, there is a huge obstacle holding back Fannie and Freddie: There's no mechanism in place for them to buy back any of the government-held senior preferred shares, no matter how much in dividends they pay to the U.S. Treasury. And the GSEs are required under their revised bailout agreements to pay all of their profits to the government, save minimal capital buffers of $3 billion apiece.

Possible Ways Forward

High profile investors including Ralph Nader and Bruce Berkowitz's Fairholme Capital Management have called for better treatment for private GSE investors. In a letter from Fairholme last week, the fund manager said "on behalf of the hundreds of thousands of Fairholme Funds shareholders who helped to rebuild American International Group (AIG - Get Report), 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.

This implies major political support for a settlement that allows non-government GSE shareholders to realize value, and also alludes to AIG's opportunity to move past its own epic bailout, when the government converted its preferred shares in the insurer to common shares. The government eventually sold all of its AIG shares back to the company or to the public, claiming a significant profit for taxpayers.
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FMCC $1.55 0.00%
FMCKJ $3.83 0.00%
FNMA $1.70 0.00%
FNMAS $3.89 0.00%
AIG $55.82 0.00%


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